Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, 68300-68328 [2021-25840]

Download as PDF 68300 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34–93614; File No. S7–19–21] RIN 3235–AM76 Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants Securities and Exchange Commission. ACTION: Proposed rule. AGENCY: The Securities and Exchange Commission (‘‘Commission’’) is proposing amendments to the electronic recordkeeping requirements for brokerdealers, security-based swap dealers (‘‘SBSDs’’), and major security-based swap participants (‘‘MSBSPs’’). DATES: Comments should be received on or before January 3, 2022. ADDRESSES: Comments may be submitted by any of the following methods: SUMMARY: We or the staff may add studies, memoranda, or other substantive items to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate Director, at (202) 551–5525; Thomas K. McGowan, Associate Director, at (202) 551–5521; Randall W. Roy, Deputy Associate Director, at (202) 551–5522; Raymond A. Lombardo, Assistant Director, at (202) 551–5755; Joseph I. Levinson, Senior Special Counsel, at (202) 551–5598; or Timothy C. Fox, Branch Chief, at (202) 551–5687, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–7010. SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/submitcomments.htm); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 19–21 on the subject line. lotter on DSK11XQN23PROD with PROPOSALS2 Paper Comments • Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–19–21. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/proposed.shtml). Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission’s public reference room. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 Commission reference Rule 17a–4 ................ Rule 18a–6 ................ CFR citation 17 CFR 240.17a–4. 17 CFR 240.18a–6. Table of Contents I. Background A. Introduction B. Current Electronic Record Preservation Requirements 1. Rule 17a–4(f) 2. Rule 18a–6(e) C. Current Prompt Production of Records Requirements II. Proposed Amendments A. Introductory Text B. Definition of Electronic Recordkeeping System C. Elimination of Notice and Representation Requirements From Rule 17a–4(f) D. Requirements for Electronic Recordkeeping Systems E. Requirements for Broker-Dealers and SBS Entities Using Electronic Recordkeeping Systems F. Requirements for Broker-Dealers Using Micrographic Media To Preserve Records G. Requirement To Produce Electronic Records in a Reasonably Usable Electronic Format III. Request for Comment IV. Economic Analysis A. Baseline 1. Broker-Dealers 2. Security-Based Swap Markets: Activity and Participants 3. Recordkeeping Practices of Market Participants B. Benefits of the Proposed Amendments C. Costs of the Proposed Amendments PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 D. Reasonable Alternatives E. Effects on Efficiency, Competition, and Capital Formation F. Request for Comment V. Paperwork Reduction Act A. Summary of Collections of Information B. Proposed Use of Information C. Respondents D. Total Initial and Annual Reporting Burdens E. Collection of Information Is Mandatory F. Confidentiality of Responses to Collection of Information G. Retention Period for Recordkeeping Requirements H. Request for Comments VI. Initial Regulatory Flexibility Act Analysis A. Reasons for, and Objectives of, the Proposed Action B. Legal Basis C. Small Entities Subject to the Proposed Rules D. Reporting, Recordkeeping, and Other Compliance Requirements E. Duplicative, Overlapping, or Conflicting Federal Rules F. Significant Alternatives G. Request for Comment VII. Small Business Regulatory Enforcement Fairness Act VIII. Statutory Authority I. Background A. Introduction Securities Exchange Act of 1934 (‘‘Exchange Act’’) Rule 17a–4 (‘‘Rule 17a–4’’) 1 sets forth record preservation requirements applicable to brokerdealers, including broker-dealers also registered as SBSDs or MSBSPs.2 Exchange Act Rule 18a–6 (‘‘Rule 18a– 6’’) 3 sets forth record preservation requirements for SBSDs and MSBSPs that are not also registered as brokerdealers (‘‘SBS Entities’’).4 The record preservation requirements of Rule 18a– 6 were modeled largely on Rule 17a–4.5 Pursuant to Sections 15F and 17(a) of the Exchange Act, the Commission is proposing amendments to Rules 17a–4 and 18a–6.6 Specifically, the proposal 1 See 17 CFR 240.17a–4. used in this release, the term ‘‘broker-dealer’’ includes broker-dealers that are also registered as SBSDs or MSBSPs. 3 See 17 CFR 240.18a–6. 4 As used in this release, the term ‘‘SBS Entity’’ refers to SBSDs and MSBSPs that are not also registered as broker-dealers. 5 See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major SecurityBased Swap Participants, and Broker-Dealers, Exchange Act Release No. 87005 (Sept. 19, 2019), 84 FR 68550 (Dec. 16, 2019) (‘‘SBSD/MSBSP Recordkeeping Adopting Release’’). 6 Section 17(a) of the Exchange Act, in pertinent part, provides the Commission with authority to issue rules requiring broker-dealers to make and keep for prescribed periods such records as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. See 15 U.S.C. 78q(a). Section 15F(f)(1)(B)(i) of the Exchange Act provides 2 As E:\FR\FM\01DEP2.SGM 01DEP2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 would amend the electronic record preservation and prompt production of records requirements of Rules 17a–4 and 18a–6.7 As discussed in greater detail in the sections below, the amendments to Rule 17a–4 would provide an audit-trail alternative to the current requirement that electronic records be preserved exclusively in a non-rewriteable, nonerasable format. The audit-trail alternative would require that firms preserve electronic records in a manner that permits the recreation of an original record if it is altered, over-written, or erased. Rule 18a–6 currently does not have a requirement to preserve electronic records: (1) In a manner that permits the recreation of an original record if it is altered, over-written or erased; or (2) exclusively in a nonrewriteable, non-erasable format. The amendments to Rule 18a–6 would provide that an electronic recordkeeping system of an SBS Entity without a prudential regulator (‘‘nonbank SBS Entity’’) must meet one of these two requirements. However, this proposed amendment would apply only to newly created records, and not to those created prior to the compliance date of proposed amendments, if adopted by the Commission.8 Rule 17a–4 currently requires a broker-dealer to engage a third party who has access to and the ability to download information from the brokerdealer’s electronic storage media to any acceptable medium under the rule. The third party must execute undertakings that it will provide access to the brokerdealer’s electronic records and provide them to the Commission and other securities regulators upon request. Rule 18a–6 currently does not have this requirement. The amendments to Rule 17a–4 would eliminate the third-party that SBSDs and MSBSPs for which there is a prudential regulator shall keep books and records of all activities related to their business as an SBSD or MSBSP in such form and manner and for such period as may be prescribed by the Commission by rule or regulation. See 15 U.S.C. 78o–10(f)(1)(B)(i). Section 15F(f)(1)(B)(ii) of the Exchange Act provides that SBSDs and MSBSPs without a prudential regulator shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation. See 15 U.S.C. 78o–10(f)(1)(B)(ii). 7 See paragraph (f) of Rule 17a–4 and paragraph (e) of Rule 18a–6 (setting forth the electronic record preservation requirements) and paragraph (j) of Rule 17a–4 and paragraph (g) of Rule 18a–6 (setting forth the prompt production of records requirements). 8 A nonbank SBSD would be able to apply the new requirements to legacy records by, for example, transferring them to an electronic recordkeeping system that preserves them: (1) In a manner that permits the recreation of an original record if it is altered, over-written or erased; or (2) exclusively in a non-rewriteable, non-erasable format. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 access and undertakings requirements and replace them with a requirement that a senior officer of the broker-dealer provide the access and undertakings. The amendments to Rule 18a–6 would add an analogous senior officer access and undertakings requirement. The amendments to Rules 17a–4 and 18a–6 would require a broker-dealer or SBS Entity, respectively, to furnish a record and its audit trail (if applicable) preserved on an electronic recordkeeping system pursuant to those rules in a reasonably usable electronic format, if requested by a representative of the Commission. This means the record would need to be produced in an electronic format that is compatible with commonly used systems for accessing and reading electronic records. Electronic records produced in a proprietary electronic format that Commission staff and other securities regulators could not read using commonly available systems for accessing and reading electronic records would not be considered to be in a reasonably usable electronic format. The amendments to Rule 17a–4 would eliminate a requirement that the broker-dealer notify its designated examining authority (‘‘DEA’’) before employing an electronic recordkeeping system. Finally, the amendments to Rules 17a–4 and 18a–6, among other things, would remove or replace text to make those rules more technology neutral and to improve readability. B. Current Electronic Record Preservation Requirements 1. Rule 17a–4(f) Exchange Act Rule 17a–3 (‘‘Rule 17a– 3’’) requires a broker-dealer to make and keep current certain books and records.9 The required records include, among other records: (1) Blotters (or other records of original entry) containing an itemized daily record of all purchases and sales of securities; (2) ledgers (or other records) reflecting all assets and liabilities, income and expense, and capital accounts; (3) a securities record or ledger reflecting separately for each security as of the clearance dates all ‘‘long’’ or ‘‘short’’ positions; (4) a memorandum of each brokerage order; (5) a memorandum of each purchase or sale of a security for the account of the broker-dealer; and (6) a record of proprietary options positions. Rule 17a– 4 requires a broker-dealer to preserve additional records if the broker-dealer makes or receives certain categories of records.10 These categories of records 9 See 17 CFR 240.17a–3. e.g., paragraphs (b)(2) through (16) of Rule 10 See, 17a–4. PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 68301 include, among other records, check books, bank statements, bills receivable or payable, communications relating to the broker-dealer’s business as such, and written agreements. Rule 17a–4 also establishes retention periods for all records required to be made and kept current under Rule 17a–3 and preserved under Rule 17a–4 (generally three or six years). Additionally, Rule 17a–4 prescribes, among other things, how the records must be retained, including the requirements with respect to preserving records electronically. The electronic record preservation requirements are set forth in paragraph (f) of Rule 17a–4 (‘‘Rule 17a–4(f)’’). These requirements were adopted by the Commission in 1997.11 The Commission intended these requirements to be technology neutral but was guided by the predominant electronic storage method at that time: Using optical platters, CD–ROMs, or DVDs (collectively, ‘‘optical disks’’).12 In particular, the rule requires that the electronic recordkeeping system preserve the records exclusively in a ‘‘non-rewriteable, non-erasable’’ (also known as a ‘‘write once, read many’’ or ‘‘WORM’’) format. The objective of the WORM requirement is to prevent the alteration, over-writing, or erasure of the records. In addition to the WORM requirement, Rule 17a–4(f) requires, among other things, that the brokerdealer: (1) Notify its DEA prior to employing electronic storage media and at least 90 days before employing electronic storage media other than optical disk technology; (2) use electronic storage media that (a) verifies 11 See Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934, Exchange Act Release No. 38245 (Jan. 31, 1997), 62 FR 6469 (Feb. 12, 1997) (‘‘Rule 17a–4(f) Adopting Release’’). The Commission proposed Rule 17a–4(f) in 1993 and at the same time the Commission staff published a no-action letter that the staff would not recommend enforcement action to the Commission if broker-dealers preserved required records using optical storage technology, subject to certain conditions. See Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934, Exchange Act Release No. 32609 (July 9, 1993), 58 FR 38092 (July 15, 1993) (proposing Rule 17a–4(f)); Letter from Michael A. Macchiaroli, Associate Director, Division of Market Regulation, Commission, to Michael D. Udoff, Chairman, Ad Hoc Record Retention Committee, Securities Industry Association (June 18, 1993) (staff no-action letter). A staff no-action letter (or other staff statement) represents the views of the staff. It is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. The staff no-action letter, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person. 12 See Rule 17a–4(f) Adopting Release, 62 FR at 6470. E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 68302 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules automatically the quality and accuracy of the recording process, (b) serializes the original and duplicate copies of the media, (c) time-dates the required retention period for the records stored on the media, and (d) has the capacity to readily download indexes and records stored on the media; (3) have facilities for immediately and easily readable projection or production of electronically stored records; (4) be ready to immediately provide a facsimile enlargement of a record stored on the media; (5) organize and index accurately information stored on the media; (6) have in place an audit system providing accountability regarding the inputting of records to the media and making any changes to those records; (7) be ready to produce the information necessary to access the records; and (8) engage a third party who has access to and the ability to download the records and that executes written undertakings to do so upon the request of the Commission or other securities regulators. As to optical disks, firms can meet the WORM requirement by ‘‘burning’’ data onto the disk, with the result that it cannot be altered, over-written, or erased, which means that this form of storage media cannot be reused. After the adoption of the WORM requirement, broker-dealers inquired about whether electronic storage recordkeeping systems that do not permanently ‘‘burn’’ records onto the storage media could meet the WORM requirement. Consequently, in 2003, the Commission issued an interpretation to clarify that the rule does not mandate the use of optical disks and, therefore, a broker-dealer can use ‘‘an electronic storage system that prevents the overwriting, erasing or otherwise altering of a record during its required retention period through the use of integrated hardware and software codes’’ (‘‘Rule 17a–4(f) Interpretation’’).13 The Rule 17a–4(f) Interpretation noted that electronic recordkeeping systems then in use employed integrated hardware and software codes that prevent the alteration, overwriting, or erasure of records during their required retention periods, and that the codes could not be turned off to remove this feature.14 Therefore, while the hardware storage medium used by these systems (i.e., magnetic disk) is inherently rewriteable, the integrated codes intrinsic to the system prevent the records from 13 See Electronic Storage of Broker-Dealer Records, Exchange Act Release No. 47806 (May 7, 2003), 68 FR 25281, 25282 (May 12, 2003). 14 Rule 17a–4(f) Interpretation, 68 FR at 25282. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 being altered, over-written, or erased during the record’s required retention period.15 The Rule 17a–4(f) Interpretation clarified that brokerdealers need not rely on a hardware solution to meet the WORM requirement (e.g., the burning of data onto an optical disk) but rather could rely on a solution that prevents records from being altered, over-written, or erased during their required retention period under Rule 17a–4 (e.g., three or six years).16 The Commission stated that its Rule 17a–4(f) Interpretation did not include electronic recordkeeping systems that mitigate the risk that records will be altered, over-written, or erased, but do not prevent alteration, over-writing, or erasure of the records.17 In the release adopting Rule 18a–6, the Commission further refined its interpretation of the WORM requirement of Rule 17a–4(f).18 In particular, the Rule 17a–4 Interpretation provided that the WORM requirement does not mandate a hardware solution (i.e., permanently ‘‘burning’’ records onto an optical disk). However, because the Rule 17a–4 Interpretation described a process of integrated software and hardware codes, broker-dealers questioned whether they could use a system that relied solely on software codes to meet the WORM requirement. The Commission clarified that ‘‘a software solution that prevents the overwriting, erasing, or otherwise altering of a record during its required retention period would meet the requirements of the rule.’’ 19 In 2017, a group of trade associations filed a petition for rulemaking with the Commission.20 The petition requested that the Commission replace the WORM requirement with more liberal ‘‘principle-based requirements’’ similar to amendments the Commodity Futures Trading Commission (‘‘CFTC’’) had made to its electronic recordkeeping 15 Id. 16 Id. at 25282–83. id. The Commission identified mitigating factors such as limiting access to the records as being insufficient on their own. 18 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68568. 19 Id. 20 See Petition 4–713 (Nov. 14, 2017) filed by the Securities Industry Financial Markets Association, Financial Services Roundtable, Futures Industry Association, International Swaps Derivatives Association, and Financial Services Institute available at https://www.sec.gov/rules/petitions/ 2017/petn4-713.pdf (‘‘Rule 17a–4(f) Rulemaking Petition’’). An addendum to the Rule 17a–4(f) Rulemaking Petition was filed on May 24, 2018, available at https://www.sec.gov/rules/petitions/ 2018/ptn4-713-addendum.pdf (‘‘Rule 17a–4(f) Rulemaking Petition Addendum’’). Comments on the petition were received and are available at https://www.sec.gov/comments/4-713/4-713.htm. 17 See PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 rule.21 The Commission has carefully considered prior comments it received relating to broker-dealer electronic recordkeeping. As discussed below, the Commission is proposing to add an alternative to the WORM requirement that would require a broker-dealer’s electronic recordkeeping system to preserve electronic records in a manner that permits the recreation of an original record if it is altered, over-written, or erased. While this proposal would not rely on ‘‘principle-based requirements’’ to protect the reliability and authenticity of electronic records, it is designed to address concerns raised by commenters about the WORM requirement.22 2. Rule 18a–6(e) In 2019, the Commission adopted Exchange Act Rules 18a–5 (‘‘Rule 18a– 5’’) 23 and 18a–6 to establish recordkeeping requirements for SBS Entities. These rules were modeled on Rules 17a–3 and 17a–4, respectively.24 The electronic preservation requirements of Rule 18a–6 are set forth in paragraph (e) of the rule (‘‘Rule 18a– 6(e)’’). Rule 18a–6(e) was modeled on Rule 17a–4(f).25 As proposed, Rule 18a– 6(e) would have included the WORM requirement.26 However, commenters requested that that the Commission not mandate that electronic records be preserved exclusively in a WORM format and not expand the WORM requirement to SBS Entities at that time.27 Commenters also requested that the Commission act on the Rule 17a–4(f) Rulemaking Petition.28 The Commission ultimately did not include the WORM requirement or any similar requirement when adopting Rule 18a–6(e). The Commission stated that ‘‘any change to the [WORM requirement] should be addressed in a separate regulatory initiative in which the Commission intends to consider electronic storage 21 See CFTC, Recordkeeping, 82 FR 24479 (May 30, 2017) (‘‘CFTC Electronic Recordkeeping Release’’). 22 See section II.D. of this release (discussing how this proposed alternative is designed to address concerns raised about the WORM requirement). 23 17 CFR 240.18a–5. 24 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68552–71. 25 See id. at 68567–69. 26 See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers; Capital Rule for Certain SecurityBased Swap Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR 25194, 25219, 25312 (May 2, 2014) (‘‘SBSD/MSBSP Recordkeeping Proposing Release’’). 27 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68568. 28 Id. E:\FR\FM\01DEP2.SGM 01DEP2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules media issues.’’ 29 Further, the Commission recognized that SBS Entities may have existing recordkeeping systems that did not meet the WORM requirement and, therefore, could incur substantial costs building a recordkeeping system that meets the requirement.30 For these reasons, Rule 18a–6(e) does not include the WORM requirement or the requirement to provide notice before employing an electronic storage system, including a 90-day notice before employing an electronic storage system that does not use optical disk technology.31 Rule 18a– 6(e) also does not include provisions of Rule 17a–4(f) that are tailored for the WORM requirement (particularly to the use of optical disk technology to meet the requirement).32 In addition to these differences from Rule 17a–4(f), Rule 18a–6(e) does not include the requirement that the firm engage a third party who has the ability to access the records and who undertakes to do so at the request of the Commission. The Commission cited comments stating that this requirement ‘‘needlessly exposes firms to data leakage and cybersecurity threats.’’ 33 In this rulemaking, the Commission is considering electronic recordkeeping systems of broker-dealers and, therefore, believes it is appropriate to also consider electronic recordkeeping systems of SBS Entities. As discussed below, the Commission is proposing amendments to Rule 18a–6(e) that largely would align with the requirements of Rule 17a–4(f), as proposed to be amended. C. Current Prompt Production of Records Requirements Paragraph (j) of Rule 17a–4 (‘‘Rule 17a–4(j)’’) requires broker-dealers to furnish promptly to the Commission legible, true, complete, and current copies of those records of the firm that are required to be preserved under Rule 17a–4 or any other record of the firm that is subject to examination under Section 17(b) of the Exchange Act.34 Paragraph (g) of Rule 18a–6 (‘‘Rule 18a– 29 Id. 30 Id. lotter on DSK11XQN23PROD with PROPOSALS2 31 Id. 32 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68568–69. 33 Id. at 68569. 34 Section 17(b) of the Exchange Act provides, in pertinent part, that all records of a broker-dealer are subject at any time, or from time to time, to such reasonable periodic, special, or other examinations by representatives of the Commission and the appropriate regulatory agency for such persons as the Commission or the appropriate regulatory agency for such persons deems necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act. See 15 U.S.C. 78q(b). VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 6(g)’’) requires SBS Entities to furnish promptly to a representative of the Commission legible, true, complete, and current copies of those records of the firm that are required to be preserved under Rule 18a–6, or any other records of the firm subject to examination or required to be made or maintained pursuant to Section 15F of the Exchange Act.35 II. Proposed Amendments A. Introductory Text The introductory text of Rule 17a–4(f) provides, in pertinent part, that the records required to be maintained and preserved pursuant to Rules 17a–3 and 17a–4 may be immediately produced or reproduced on ‘‘micrographic media’’ or by means of ‘‘electronic storage media’’ that meet the conditions set forth in the rule and be maintained and preserved for the required time in that form. The term ‘‘micrographic media’’ refers to microfilm, microfiche, or any similar medium.36 The introductory text of Rule 18a–6(e) provides, in pertinent part, that the records required to be maintained and preserved pursuant to Rules 18a–5 and 18a–6 may be immediately produced or reproduced by means of an electronic storage system that meets the conditions set forth in the rule and be maintained and preserved for the required time in that form. This text diverges from Rule 17a–4(f) in two material respects. First, it does not refer to ‘‘micrographic media.’’ When proposing Rule 18a–6(e), the Commission expressed a preliminary belief that SBS Entities would not use micrographic media because electronic storage media is more technologically advanced and offers greater flexibility in managing records.37 The Commission also expressed a preliminary belief that most broker-dealers use electronic storage media rather than micrographic media for the same reasons.38 The Commission reiterated these beliefs when adopting Rule 18a–6(e) and, consequently, that rule does not include a micrographic media option for preserving records.39 35 Section 15F(f)(1) of the Exchange Act provides, in pertinent part, that SBSDs and MSBSPs shall keep books and records required by Commission rule open to inspection and examination by any representative of the Commission. See 15 U.S.C. 78o–10(f)(1). 36 See paragraph (f)(1)(i) of Rule 17a–4 (defining the term ‘‘micrographic media’’). 37 See SBSD/MSBSP Recordkeeping Proposing Release, 79 FR at 25219. 38 Id. at 25219, n.378. 39 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68550. As discussed below, Rule 17a–4(f), as proposed to be amended, would retain provisions governing the use of micrographic media but move them to a new paragraph (f)(4) of the rule. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 68303 The second way in which the introductory text of Rule 18a–6(e) diverges from Rule 17a–4(f) in a material way is that the former refers to an electronic storage system rather than electronic storage media. As proposed, Rule 18a–6(e) would have used the term ‘‘electronic storage media.’’ 40 However, when adopting Rule 18a–6(e), the Commission explained that the phrase ‘‘electronic storage media’’ was replaced with the phrase ‘‘electronic storage system’’ throughout the rule to clarify that the final rule does not require the use of a particular storage medium such as optical disk or CD–ROM.41 The Commission is proposing amendments to the introductory text of Rule 17a–4(f) to make the rule more technology neutral. In particular, the phrase ‘‘electronic storage media’’ would be replaced with the phrase ‘‘electronic recordkeeping system’’ throughout the rule, including in the introductory text. The Commission is proposing a conforming amendment to Rule 18a–6(e) to replace the phrase ‘‘electronic storage system’’ with the phrase ‘‘electronic recordkeeping system’’ throughout the rule, including in the introductory text. The Commission preliminarily believes that the phrase ‘‘electronic recordkeeping system’’ better characterizes a system that produces and preserves records electronically. The term ‘‘electronic storage media’’ generally refers to the devices (hardware) used to store data (e.g., floppy disks, optical disks, universal serial bus (USB) drives, and magnetic disks). The Commission believes ‘‘electronic recordkeeping system’’ is a more accurate term because it would encompass both the hardware and software used to store records electronically. Consistent with this proposal, the amendments to Rule 18a– 6(e) would replace the term ‘‘electronic storage system’’ throughout the rule with the term ‘‘electronic recordkeeping system,’’ including in the introductory text. In addition, the Commission is proposing amendments to the introductory text of Rules 17a–4(f) and 18a–6(e) solely to improve clarity and readability, but that otherwise are not intended to alter the meaning of either introductory text.42 40 See SBSD/MSBSP Recordkeeping Proposing Release, 79 FR at 25312. 41 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68550. 42 The proposed amendments to Rule 17a–4(f) would replace the current introductory text that reads ‘‘(f) The records required to be maintained and preserved pursuant to §§ 240.17a–3 and 240.17a–4 may be immediately produced or reproduced on ‘‘micrographic media’’ (as defined in this section) or by means of ‘‘electronic storage E:\FR\FM\01DEP2.SGM Continued 01DEP2 68304 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 B. Definition of Electronic Recordkeeping System Paragraphs (f)(1)(i) and (ii) of Rule 17a–4 currently define the terms ‘‘micrographic media’’ and ‘‘electronic storage media,’’ respectively. Paragraph (e)(1) of Rule 18a–6 defines the term ‘‘electronic storage system.’’ Paragraph (f)(1)(ii) of Rule 17a–4 defines the term ‘‘electronic storage media’’ as, in pertinent part, any digital storage medium or system that meets the requirements of the rule. Paragraph (e)(1) of Rule 18a–6 defines the term ‘‘electronic storage system’’ as, in pertinent part, any digital storage system that meets the requirements of the rule. As discussed above, the Commission is proposing to use the term ‘‘electronic recordkeeping system’’ in Rules 17a–4(f) and 18a–6(e). Consequently, the Commission is proposing to define the term ‘‘electronic recordkeeping system’’ in both rules as ‘‘a system that preserves records in a digital format and that requires a computer to access the records.’’ 43 The Commission preliminarily believes this definition better describes a system that produces and preserves records electronically.44 For these reasons, the proposed amendments to Rules 17a–4(f) and 18a–6(e) would replace the definitions of ‘‘electronic storage media’’ and ‘‘electronic storage system’’ in those rules, respectively, with this media’’ (as defined in this section) that meet the conditions set forth in this section and be maintained and preserved for the required time in that form’’ with text that reads ‘‘(f) The records required to be maintained and preserved pursuant to §§ 240.17a–3 and 240.17a–4 may be immediately produced or reproduced by means of an electronic recordkeeping system or by means of micrographic media subject to the conditions set forth in this paragraph and be maintained and preserved for the required time in that form.’’ The proposed amendments to Rule 18a–6(e) would replace the current introductory text that reads ‘‘(e) The records required to be maintained and preserved pursuant to §§ 240.18a–5 and 240.18a–6 may be immediately produced or reproduced by means of an electronic storage system (as defined in this paragraph (e)) that meets the conditions set forth in this paragraph (e) and be maintained and preserved for the required time in that form’’ with text that reads ‘‘(e) The records required to be maintained and preserved pursuant to §§ 240.18a–5 and 240.18a–6 may be immediately produced or reproduced by means of an electronic recordkeeping system subject to the conditions set forth in this paragraph and be maintained and preserved for the required time in that form.’’ 43 See paragraph (f)(1)(ii) of Rule 17a–4 and paragraph (e)(1) of Rule 18a–6, as proposed to be amended. 44 See 36 CFR 1220.18 (regulation of the U.S. National Archives and Records Administration defining ‘‘electronic record,’’ in pertinent part, as ‘‘any information that is recorded in a form that only a computer can process’’ and defining ‘‘recordkeeping system’’ as a ‘‘a manual or electronic system that captures, organizes, and categorizes records to facilitate their preservation, retrieval, use, and disposition’’). VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 definition of ‘‘electronic recordkeeping system.’’ C. Elimination of Notice and Representation Requirements From Rule 17a–4(f) Paragraph (f)(2)(i) of Rule 17a–4 requires a broker-dealer to notify its DEA prior to employing electronic storage media, including a 90-day notice if the broker-dealer intends to employ electronic storage media other than optical disk technology. Paragraph (f)(2)(i) also requires a representation from the broker-dealer or the storage medium vendor or another third party with appropriate expertise that the selected electronic storage medium meets the conditions set forth in paragraph (f)(2)(ii), which are discussed below. The Commission is proposing to eliminate these notification and representation requirements from Rule 17a–4(f). The Commission preliminarily believes they are no longer necessary. They were adopted at a time when the use of electronic recordkeeping systems by broker-dealers to meet the record preservation requirements of Rule 17a– 4 was a relatively new phenomenon.45 The requirements alerted the brokerdealer’s DEA of the firm’s intent to use electronic storage media to meet the record preservation requirements of Rule 17a–4. Given that the Commission and broker-dealer DEAs now have over 25 years of experience with brokerdealers using electronic recordkeeping systems, these requirements may no longer serve a useful purpose. As noted above, the Commission did not include analogous requirements in Rule 18a– 6(e). D. Requirements for Electronic Recordkeeping Systems Paragraphs (f)(2)(ii)(A) through (D) of Rule 17a–4 set forth technical requirements for electronic storage media if used by a broker-dealer to meet the record preservation requirements of Rule 17a–4. Similarly, paragraphs (e)(2)(i) through (iii) of Rule 18a–6 set forth technical requirements for an electronic storage system if used by an SBS Entity to meet the record preservation requirements of Rule 18a– 6. As discussed below, the Commission is proposing amendments to these requirements.46 45 As discussed above, Rule 17a–4(f) was adopted in 1997. 46 In addition to the proposed amendments discussed below, the Commission is proposing to simplify the introductory text of paragraphs (f)(2) and (e)(2) of Rules 17a–4 and 18a–6, respectively. In particular, the introductory text of paragraph (f)(2) of Rule 17a–4 (which provides that ‘‘If PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 As a preliminary matter, the requirements for electronic recordkeeping systems in Rule 17a–4(f) would apply to all broker-dealers. However, the Commission is proposing to limit the application of the requirements for electronic recordkeeping systems in paragraph (e)(2) of Rule 18a–6 to nonbank SBS Entities, that is, SBS Entities without a prudential regulator. SBS Entities with a prudential regulator (‘‘bank SBS Entities’’) would therefore not be subject to the requirements of paragraph (e)(2) of Rule 18a–6, as proposed to be amended.47 Unlike nonbank SBS Entities, bank SBS Entities are subject to oversight and supervision by the banking agencies with respect to record preservation. This oversight and supervision may now or in the future include regulations or guidance with respect to requirements for electronic recordkeeping systems that differ from the proposed requirements for electronic recordkeeping systems electronic storage media is used by a member, broker, or dealer, it must comply with the following requirements:’’) and paragraph (f)(2)(ii) of Rule 17a– 4 (which provides that ‘‘The electronic storage media must:’’) would be simplified to a single introductory text for paragraph (f)(2) providing that ‘‘An electronic recordkeeping system must:’’). The introductory text of paragraph (e)(2) of Rule 18a– 6 (providing that ‘‘If an electronic storage system is used by a security-based swap dealer or major security-based swap participant, it must:’’) would be modified to provide that ‘‘An electronic recordkeeping system of a security-based swap dealer or major security-based swap participant without a prudential regulator must:’’. The amendments to paragraph (f)(2) of Rule 17a–4 would result in the following numbering changes: (1) The new audit-trail requirement would be set forth in paragraph (f)(2)(i)(A) of Rule 17a–4, as proposed to be amended; (2) the existing WORM requirement of paragraph (f)(2)(ii)(A) of Rule 17a– 4 would be set forth in paragraph (f)(2)(i)(B) of Rule 17a–4, as proposed to be amended; (3) the amended requirement of paragraph (f)(2)(ii)(B) of Rule 17a– 4 would be set forth in paragraph (f)(2)(ii) of Rule 17a–4, as proposed to be amended; (4) the amended requirement of paragraph (f)(2)(ii)(C) of Rule 17a– 4 would be set forth in paragraph (f)(2)(iii) of Rule 17a–4, as proposed to be amended; and (5) the amended requirement of paragraph (f)(2)(ii)(D) of Rule 17a–4 would be set forth in paragraph (f)(2)(iv) of Rule 17a–4, as proposed to be amended. The amendments to paragraph (e)(2) of Rule 18a–6 would result in the following numbering changes: (1) The new audit-trail and WORM alternative requirements would be set forth in paragraphs (e)(2)(i)(A) and (B), respectively, of Rule 18a–6, as proposed to be amended; (2) the amended requirement of paragraph (e)(2)(i) of Rule 18a–6 would be set forth in paragraph (e)(2)(ii) of Rule 18a–6, as proposed to be amended; (3) the amended requirement of paragraph (e)(2)(ii) of Rule 18a–6 would be set forth in paragraph (e)(2)(iii) of Rule 18a–6, as proposed to be amended; and (4) the amended requirement of paragraph (e)(2)(iii) of Rule 18a–6 would be set forth in paragraph (e)(2)(iv) of Rule 18a–6, as proposed to be amended. 47 See the introductory text to paragraph (e)(2) of Rule 18a–6, as proposed to be amended (limiting the paragraph’s requirements to an SBS Entity without a prudential regulator). E:\FR\FM\01DEP2.SGM 01DEP2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 discussed below.48 In particular, the proposal to amend the requirements for electronic recordkeeping systems in paragraph (e)(2) of Rule 18a–6 to add the audit-trail and WORM alternative requirements could impose requirements that conflict with regulations or guidance of the prudential regulators. Further, the recordkeeping requirements of Rules 18a–5 and 18a–6 applicable to bank SBS Entities are more limited in scope because: (1) The Commission’s authority under Section 15F(f)(1)(B)(i) of the Exchange Act is tied to activities related to the conduct of the firm’s business as an SBS Entity; (2) bank SBS Entities are subject to recordkeeping requirements applicable to banks with respect to their banking activities; and (3) the prudential regulators—rather than the Commission—are responsible for capital, margin, and other prudential requirements applicable to bank SBS Entities.49 For these reasons, the Commission preliminarily believes that it would be appropriate to not impose the requirements for electronic recordkeeping systems in paragraph (e)(2) of Rule 18a–6, as proposed to be amended, on bank SBS Entities, but continue to impose them, as proposed to be amended, on nonbank SBS Entities. Paragraph (f)(2)(ii)(A) of Rule 17a–4 sets forth the WORM requirement. The Commission is proposing to amend Rule 17a–4(f) to add an audit-trail alternative to the WORM requirement for brokerdealers.50 In addition, the Commission is proposing to amend Rule 18a–6(e) to require that the electronic recordkeeping systems of nonbank SBS Entities must meet either the audit-trail requirement or the WORM requirement.51 Unlike bank SBS Entities, the Commission is responsible for promulgating capital and margin requirements for nonbank SBS Entities and overseeing their compliance with 48 Unlike Rules 17a–3 and 17a–4 which consolidate broker-dealer recordkeeping requirements, the recordkeeping requirements for banks are diffuse. See, e.g., 31 CFR 1020.410 (recordkeeping requirements under the Bank Secrecy Act regarding funds transfers equal to or greater than $3,000); 12 CFR 9.8 (recordkeeping requirements regarding fiduciary accounts); 12 CFR 12.3 (recordkeeping requirements for securities transactions); 12 CFR 25.42 (recordkeeping requirements for small business and farm loans, including requirement to maintain the information in machine readable form). 49 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68552. 50 See paragraph (f)(2)(i)(A) of Rule 17a–4, as proposed to be amended. As discussed above, the existing WORM requirement of Rule 17a–4 would be set forth in paragraph (f)(2)(i)(B) of Rule 17a–4, as proposed to be amended. 51 See paragraph (e)(2)(i)(B) of Rule 18a–6, as proposed to be amended. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 those requirements.52 Given this broader regulatory responsibility over nonbank SBS Entities, the Commission preliminarily believes it would be appropriate to amend the existing requirements for electronic recordkeeping systems in Rule 18a–6(e) to add the requirement that the systems must meet either the audit-trail or WORM requirement. As discussed below, a WORM-compliant electronic recordkeeping system may be preferable for certain types of records. Moreover, including this alternative in the proposed amendments to Rule 18a–6(e) would provide nonbank SBS Entities the same two alternatives that brokerdealers would have under the proposed amendments to Rule 17a–4(f). Under the proposed amendments to Rule 17a–4(f), broker-dealers would have an option to employ electronic recordkeeping systems that meet the audit-trail requirement as an alternative to the existing WORM requirement (which requirement would be retained in the rule). Under the proposed amendments to Rule 18a–6(e), nonbank SBS Entities would need to employ electronic recordkeeping systems that meet either the proposed audit-trail requirement or the proposed WORM requirement. Broker-dealers and nonbank SBS Entities would have the flexibility to preserve all of their electronic records either by (1) consistently using an electronic recordkeeping system that meets either the audit-trail requirement or the WORM requirement or (2) preserving some electronic records using an electronic recordkeeping system that meets the audit-trail requirement and preserving other electronic records using an electronic recordkeeping system that meets the WORM requirement.53 In the case of both rules, the object of the proposal is to require broker-dealers and nonbank SBS Entities to preserve electronic records in a manner that permits original records to be re-created if altered, over-written, or erased, or that prevents original records from being altered, over-written, or erased. The objective is to require 52 See 15 U.S.C. 78o–10(e)(1)(B). See also Capital, Margin, and Segregation Requirements for SecurityBased Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Exchange Act Release No. 86175 (Jun. 21, 2019), 84 FR 43872 (Aug. 22, 2019) (‘‘SBSD/MSBSP Capital, Margin, and Segregation Adopting Release’’) (Commission release adopting capital and margin requirements for nonbank SBS Entities). 53 As discussed in more detail below, brokerdealers and nonbank SBS Entities could for business reasons elect to use two recordkeeping systems if the proposals are adopted: One that complies with the audit-trail requirement and one that complies with the WORM requirement. PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 68305 these registrants to maintain and preserve electronic records in a manner that protects the authenticity and reliability of original records. The audit-trail alternative would be designed to address concerns that the WORM requirement causes some firms to deploy an electronic recordkeeping system that serves no purpose other than to hold records in a manner that meets the Commission’s regulatory requirements for electronic recordkeeping systems.54 In particular, following the publication of the Rule 17a–4(f) Interpretation, third-party vendors developed software-based solutions designed to meet the WORM requirement of Rule 17a–4(f). Some broker-dealers use these electronic storage solutions to meet the WORM requirement. However, the records stored on these electronic recordkeeping systems are often retained in that particular format solely for the purpose of meeting the WORM requirement (i.e., they are not the records and associated electronic recordkeeping systems the firms use for business purposes). Broker-dealers have explained to Commission staff that the electronic recordkeeping systems used for business purposes are dynamic and updated constantly (e.g., with each new transaction or position) and easily accessible for retrieving records; whereas the WORM-compliant electronic recordkeeping systems are more akin to static ‘‘snapshots’’ of the records at a point in time and less accessible.55 As a result, some brokerdealers currently use WORM-compliant electronic recordkeeping systems solely to meet the requirements of Rule 17a– 4(f). Broker-dealers retrieve records from their business-based electronic recordkeeping systems for their own purposes. In addition, the Commission understands that firms generally retrieve and produce records from their business-based electronic recordkeeping systems rather than from their WORMcompliant electronic recordkeeping systems in response to requests from securities regulators because these records are easier to retrieve. Commission staff typically do not specifically request that records be produced from the WORM-compliant 54 See Rule 17a–4(f) Rulemaking Petition at 4 (‘‘Today, WORM systems are costly, outmoded, and inefficient storage containers used exclusively to meet the rule’s requirements.’’). 55 See Rule 17a–4(f) Rulemaking Petition at 4 (‘‘Data stored in WORM is essentially a static snapshot of a record that is locked and secured from any manipulation or deletion, as opposed to a complete system that could be used to stand up a production system during or following a disaster event.’’). E:\FR\FM\01DEP2.SGM 01DEP2 68306 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 recordkeeping system.56 The exception would be a case where alteration is suspected. In that case, the staff would request records from the WORMcompliant electronic recordkeeping system. For these reasons, the Commission is proposing to amend Rule 17a–4(f) to provide an audit-trail alternative to the WORM requirement. In addition, the Commission is proposing to require nonbank SBS Entities to use electronic recordkeeping systems that meet either the audit-trail or WORM requirement. Under the audit-trail alternative, the electronic recordkeeping system would need to preserve the records for the duration of their applicable retention periods in a manner that maintains a complete time-stamped audit trail that includes: (1) All modifications to and deletions of a record or any part thereof; (2) the date and time of operator entries and actions that create, modify, or delete the record; (3) the individual(s) creating, modifying, or deleting the record; and (4) any other information needed to maintain an audit trail of each distinct record in a way that maintains security, signatures, and data to ensure the authenticity and reliability of the record and will permit re-creation of the original record and interim iterations of the record.57 The objective of the proposed audit-trail alternative is to require the electronic recordkeeping system to be configured so that an original record that is altered, overwritten, or erased can be re-created for the retention period applicable to the original record. This would be an alternative to the WORM requirement, which prevents an original record from being altered, over-written, or erased for its required retention period. It is the Commission’s understanding that electronic recordkeeping systems used by certain broker-dealers and nonbank SBS Entities for business purposes can be configured to meet the audit-trail requirement. Therefore, this 56 See also Rule 17a–4(f) Rulemaking Petition at 5 (‘‘[O]ur members report that regulators (including SEC and FINRA examiners and enforcement staff) do not typically ask for production of records from WORM storage because the information or data is not readily sortable or searchable. Regulators instead request customized extracts or views of data collected from active storage systems where the record was originally created, that has not yet been transferred to a WORM system.’’). 57 See, e.g., 21 CFR 11.10 (regulation of the U.S. Food and Drug Administration setting forth requirements for persons who used closed systems to create, modify, maintain, or transmit electronic records and requiring, among other things, the use of time-stamped audit trails to independently record the date and time of operator entries and actions that create, modify, or delete electronic records and that record changes shall not obscure previously recorded information). VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 amendment along with the others proposed in the release are designed to facilitate the use of a single electronic recordkeeping system for business and regulatory purposes. Under the proposed amendments, broker-dealers could potentially continue to use the electronic recordkeeping systems they currently employ to meet the WORM requirement. Similarly, nonbank SBS Entities would have the option to use electronic recordkeeping systems that meet the WORM requirement (as an alternative to the audit-trail requirement).58 For example, WORM-compliant electronic recordkeeping systems may be appropriate for storing certain types of records such as emails (as compared to transaction and ledger account data that is updated continuously).59 Moreover, some broker-dealers may choose to use their existing WORM-compliant electronic recordkeeping systems rather than adopt a new technology. Further, some broker-dealers may choose to retain existing electronic records on a legacy WORM-compliant electronic recordkeeping system, including software-based systems that are designed to follow the Rule 17a–4(f) Interpretation rather than transfer them to an electronic recordkeeping system that would meet the proposed audit-trail requirement. However, these firms could decide to preserve new records on an electronic recordkeeping system that would meet the proposed audit-trail requirement. Paragraph (f)(2)(ii)(B) of Rule 17a–4 requires electronic storage media used by a broker-dealer to verify automatically the quality and accuracy of the storage media recording process. Similarly, paragraph (e)(2)(i) of Rule 18a–6 requires an electronic storage system used by an SBS Entity to verify automatically the quality and accuracy of the electronic storage system recording process. The Commission is proposing to amend the requirements set forth in these two paragraphs. The 58 The Commission would interpret the WORM requirement as set forth in the text of paragraph (e)(2)(i)(B) of Rule 18a–6, as proposed to be amended, consistently with how the WORM requirement as set forth in the text of paragraph (f)(2)(ii)(A) of Rule 17a–4 was interpreted by the Commission in 2019 and 2003. See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68568; Rule 17a–4(f) Interpretation, 68 FR 25281. 59 See Rule 17a–4(f) Rulemaking Petition at 4 (‘‘Although storing electronic communications data—like email and instant messaging, or common unstructured file types such as PDF—in WORM format has become standardized, dynamic content generated by complex trading and risk systems, emerging communications platforms, as well as records created by aggregating information from various systems, cannot be easily stored in WORM format.’’). PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 amendments would require that the electronic recordkeeping system used by a broker-dealer or nonbank SBS Entity must verify automatically the completeness and accuracy of the processes for storing and retaining records electronically.60 The proposed new text is intended to specify that the requirement is designed to ensure that when an original record is added to the electronic recordkeeping system it is completely and accurately captured in the system.61 Paragraph (f)(2)(ii)(C) of Rule 17a–4 requires electronic storage media used by a broker-dealer to serialize the original and, if applicable, duplicate units of storage media, and time-date for the required period of retention the information placed on such electronic storage media. Paragraph (e)(2)(ii) of Rule 18a–6 requires an electronic storage system used by an SBS Entity, if applicable, to serialize the original and duplicate units of the storage media, and time-date for the required period of retention the information placed in such electronic storage system. Consequently, Rule 18a–6(e) imposes the requirement on an SBS Entity only if serializing and time-dating storage media is applicable. The Commission explained this difference between Rule 17a–4(f) and Rule 18a– 6(e) by stating that serialization and time-dating is required when a firm uses optical disks to meet the WORM requirement.62 As discussed above, the Commission is proposing amendments to Rules 17a–4(f) and 18a–6(e) that would provide firms with the option of using electronic recordkeeping systems that meet either the audit-trail requirement or the WORM requirement. Moreover, as discussed above, the Rule 17a–4(f) Interpretation, which is extant, clarifies that Rule 17a–4(f) does not mandate the use of optical disk to meet the WORM requirement.63 Under the proposed amendments to Rules 17a–4(f) 60 See paragraph (f)(2)(ii) of Rule 17a–4 and paragraph (e)(2)(ii) of Rule 18a–6, as proposed to be amended. 61 In this regard, the proposed text would replace the text in Rules 17a–4(f) and 18a–6(e) that reads ‘‘Verify automatically the quality and accuracy of the electronic storage system recording process’’ with the phrase ‘‘Verify automatically the completeness and accuracy of the processes for storing and retaining records electronically.’’ See paragraph (f)(2)(ii) of Rule 17a–4 and paragraph (e)(2)(ii) of Rule 18a–6, as proposed to be amended. 62 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68568. 63 See Rule 17a–4(f) Interpretation. The Commission would interpret the rule text in Rule 18a–6(e), as proposed to be amended, consistently with the Rule 17a–4(f) Interpretation of the WORM requirement and the 2019 interpretation of the WORM requirement. See Rule 17a–4(f) Interpretation, 68 FR 25281; SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68568. E:\FR\FM\01DEP2.SGM 01DEP2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 and 18a–6(e), the serialization and timestamping requirements would apply only if the firm uses optical disks as the storage media to meet the WORM requirement. For this reason, the Commission is proposing to amend Rule 17a–4(f) to provide that the requirement is triggered if applicable.64 Paragraph (f)(2)(ii)(D) of Rule 17a–4 requires electronic storage media used by a broker-dealer to have the capacity to readily download indexes and records preserved on the electronic storage media to any medium acceptable under Rule 17a–4 as required by the Commission or the self-regulatory organizations (‘‘SROs’’) of which the broker-dealer is a member. Paragraph (e)(2)(iii) of Rule 18a–6 requires an electronic storage system used by an SBS Entity to have the capacity to readily download into a readable format indexes and records preserved in the electronic storage system. Indexes organize records and are a means for locating specific records within a recordkeeping system. However, electronic recordkeeping systems may use other means to organize and locate records. The Commission is proposing to amend the text of these two requirements to incorporate the information that would be stored under the proposed audit-trail requirement and to specify that the electronic recordkeeping system must have the capacity to readily download and transfer copies of a record and its audit trail (if applicable) in both a human readable format and in a reasonably usable electronic format.65 A human readable format would be a format that can be naturally read by an individual. A reasonably usable electronic format would be a format that is common and compatible with commonly used systems for accessing and reading electronic records. This proposed requirement is designed to address an electronic recordkeeping system that stores records in a proprietary file format that cannot be accessed or read by commonly used systems. In this case, producing the records in their native file 64 See paragraph (f)(2)(iii) of Rule 17a–4 (f) as proposed to be amended. The Commission is proposing amendments to the serialization and time-stamping requirement of paragraph (e)(2) of Rule 18a–6 to further clarify that it is tied to the use of optical disks to meet the WORM requirement. In particular, the phrase ‘‘placed in such electronic storage system’’ would be replaced with the phrase ‘‘placed on such electronic storage media.’’ See paragraph (e)(2)(iii) of Rule 18a–6, as proposed to be amended. 65 As discussed in section II.G. of this release, the Commission also is proposing to amend paragraph (j) of Rule 17a–4 and paragraph (g) of Rule 18a–6 to require that an electronic record be produced in a reasonably usable electronic format. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 format would be meaningless since they could not be accessed or read by securities regulators.66 Moreover, depending on the nature and volume of the requested records, producing them in a human readable format may hinder or delay an examination or investigation because it would take more time to search the records for relevant information; whereas electronic records can be searched and sorted using a computer. Conversely, in some cases, it may be more efficient to produce a record in a human readable format; for example, if an examiner is on site and requests a specific record. For these reasons, the proposed amendments would require that the electronic recordkeeping system have the capacity to readily download and transfer copies of a record and its audit trail (if applicable) in both a human readable format and in a reasonably usable electronic format. Further, rather than refer to the capacity to download indexes, the proposed requirements would require the capacity to download and transfer information needed to locate specific electronic records. In particular, the proposed amendments would require the electronic recordkeeping system to have the capacity to readily download and transfer copies of a record and its audit trail (if applicable) in both a human readable format and in a reasonably usable electronic format and to download and transfer the information needed to locate the electronic record.67 The requirement to 66 If the native file format used by the firm is compatible with commonly used systems for accessing and reading electronic records, it could be produced in that format. 67 See paragraph (f)(2)(iv) of Rule 17a–4 and paragraph (e)(2)(iv) of Rule 18a–6, as proposed to be amended. The current text of Rule 17a–4(f) sometimes prescribes requirements that refer to the staffs of Commission and SROs of which the brokerdealer is a member. See paragraphs (f)(2)(ii)(D), (f)(3)((i), (f)(3)(iv)(A), (f)(3)(v)((A), and (f)(3)(vi) of Rule 17a–4. In other cases, the current text refers to the staffs of Commission, SROs of which the broker-dealer is a member, and state securities regulators having jurisdiction over the brokerdealer. See paragraphs (f)(3)(ii) and (vii) of Rule 17a–4. The Commission is proposing to consistently reference the staffs of the Commission, SROs of which the broker-dealer is a member, and state securities regulators having jurisdiction over the broker-dealer. See paragraphs (f)(2)(iv), (f)(3)(i), (f)(3)(ii), (f)(3)(v)(B), (f)(3)(vi), (f)(3)(vii), (f)(4)(i), (f)(4)(ii), and (f)(iv)(A) of Rule 17a–4, as proposed to be amended. The current text of Rule 18a–6(e) sometimes prescribes requirements that refer to the staff of the Commission. See paragraphs (e)(3)(i), (e)(3)(iv)(A), (e)(3)(v)(A), and (e)(3)(vi) of Rule 18a– 6. The rule does not refer to the staffs of SROs of which the SBS Entity is a member because SBS Entities will not be members of an SRO. However, SBS Entities may be subject to the jurisdiction of state securities regulators. Consequently, the Commission is proposing to add references to the staffs of state securities regulators having PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 68307 download and transfer audit trails would apply only if the firm’s electronic recordkeeping system uses the audittrail alternative. The more general reference to ‘‘information needed to locate the electronic record’’ would be designed to incorporate whatever means a particular electronic recordkeeping systems uses to organize the records and locate a specific record (e.g., indexes or data fields). E. Requirements for Broker-Dealers and SBS Entities Using Electronic Recordkeeping Systems Paragraph (f)(3) of Rule 17a–4 and paragraph (e)(3) of Rule 18a–6 impose obligations on broker-dealers and SBS Entities, respectively, related to their use of electronic recordkeeping systems. In general, these requirements are designed to ensure that the staffs of the Commission and other relevant securities regulators can access and examine the records. As discussed below, the Commission is proposing amendments to these requirements. Under the proposed amendments, prudentially regulated SBS Entities would no longer be subject to the requirements of paragraph (e)(2) of Rule 18a–6. Prudentially regulated SBS Entities would, however, continue to be subject to the requirements of paragraph (e)(3) of the rule. Paragraph (e)(3) of Rule 18a–6 does not impose technical requirements on the electronic recordkeeping system. Instead, it specifies the requirements for the SBS Entity in connection with its use of an electronic recordkeeping system. As noted above, these requirements generally are designed to ensure that the staffs of the Commission and other relevant regulators can access and examine the records. For these reasons, the Commission preliminarily believes they should continue to apply to bank SBS Entities. The introductory text of paragraph (f)(3) of Rule 17a–4 provides that if the broker-dealer uses micrographic media or electronic storage media, it must comply with requirements set forth in the paragraph, which are discussed below. Similarly, the introductory text of paragraph (e)(3) of Rule 18a–6 provides that, if an SBS Entity uses an electronic storage system, it must comply with the requirements set forth in the paragraph, which are also discussed below. The Commission is jurisdiction over the SBS Entity when there is a reference to the staff of the Commission. See paragraphs (e)(2)(iv), (e)(3)(i), (e)(3)(ii), (e)(3)(v)(B), (e)(3)(vi), and (e)(3)(vii) of Rule 18a–6, as proposed to be amended. E:\FR\FM\01DEP2.SGM 01DEP2 68308 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 proposing to simplify the introductory text of both paragraphs.68 Paragraph (f)(3)(i) of Rule 17a–4 requires a broker-dealer to at all times have available, for examination by Commission or SRO staff, facilities for the immediate, easily readable projection or production of micrographic media or electronic storage media images and for the production of easily readable images. Similarly, paragraph (e)(3)(i) of Rule 18a–6 requires an SBS Entity to at all times have available for examination by Commission staff facilities for the immediate, easily readable projection or production of records or images maintained on an electronic storage system and for the production of easily readable copies of those records or images. The Commission is proposing amendments to paragraph (f)(3)(i) of Rule 17a–4 that would delete references to micrographic media and replace terms that are tied to micrographic media.69 In addition, the proposed amendments to paragraphs (f)(3)(i) of Rule 17a–4 and (e)(3)(i) of Rule 18a–6 are intended to replace terms that are tied to optical disk technology.70 The Commission’s objective is to set forth new requirements that would require broker-dealers and SBS Entities to have facilities available to produce records to the staffs of the Commission, SROs, and state securities regulators, as applicable, and to read records stored on an electronic recordkeeping system.71 68 See introductory text of paragraph (f)(3) of Rule 17a–4 and paragraph (e)(3) of Rule 18a–6, as proposed to be amended (providing, respectively, that a broker-dealer or SBS Entity ‘‘using an electronic recordkeeping system must:’’). In addition, the introductory text of paragraph (f)(3) of Rule 17a–4, as proposed to be amended, would not reference ‘‘micrographic media,’’ instead, the existing requirements for using micrographic media would be set forth in new paragraph (f)(4) of Rule 17a–4. 69 While paragraph (f)(3)(i) of Rule 17a–4, as proposed to be amended, would no longer reference micrographic media, a broker-dealer would continue to be able to use micrographic media to preserve records under the requirements set forth in new paragraph (f)(4) of Rule 17a–4. 70 In particular, the amendments to Rule 17a–4 would replace the phrase ‘‘electronic storage media images’’ and the term ‘‘images’’ with the term ‘‘record’’ and the amendments Rules 17a–4 and 18a–6 would remove the term ‘‘projection.’’ The amendments to Rule 18a–6 would remove the term ‘‘images.’’ 71 See paragraph (f)(3)(i) of Rule 17a–4, as proposed to be amended (providing that a brokerdealer must ‘‘[a]t all times have available, for examination by the staffs of the Commission, the self-regulatory organizations of which the member, broker, or dealer is a member, or any State securities regulator having jurisdiction over the member, broker or dealer facilities for immediate production of records preserved by means of the electronic recordkeeping system and for producing copies of those records’’) and paragraph (e)(3)(i) of VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 Paragraph (f)(3)(ii) of Rule 17a–4 requires a broker-dealer to be ready at all times to provide, and immediately provide, any facsimile enlargement that the staff of the Commission, an SRO, or state securities regulator may request. Similarly, paragraph (e)(3)(ii) of Rule 18a–6 requires that an SBS Entity be ready at all times to immediately provide in a readable format any record or index stored on the electronic storage system that the staff of the Commission requests. The Commission is proposing amendments to both of these paragraphs to require the broker-dealer and the SBS Entity to be ready at all times to provide records stored on an electronic recordkeeping system. In particular, the current text of both paragraphs would be replaced with new text requiring the broker-dealer or SBS Entity to be ready at all times to provide immediately any record or information needed to locate records stored by means of the electronic recordkeeping system that the staffs of the Commission, SROs, and state securities regulators, as applicable, may request.72 Paragraph (f)(3)(iii) of Rule 17a–4 requires a broker-dealer to store separately from the original, on any medium acceptable under Rule 17a–4, a duplicate copy of a record for the requisite time period. Similarly, paragraph (e)(3)(iii) of Rule 18a–6 requires that an SBS Entity store separately from the original a duplicate copy of a record stored on the electronic storage system for the requisite time period. These current provisions require broker-dealers and SBS Entities to maintain a second copy of each record. The Commission is proposing amendments to both of these paragraphs to require the broker-dealer and the SBS Entity to have a backup set of records when records are preserved on an electronic recordkeeping system.73 Rule 18a–6, as proposed to be amended (providing that an SBS Entity must ‘‘[a]t all times have available, for examination by the staffs of the Commission or any State regulator having jurisdiction over the security-based swap dealer or major security-based swap participant, facilities for immediate production of records preserved by means of the electronic recordkeeping system and for producing copies of those records’’). 72 See paragraph (f)(3)(ii) of Rule 17a–4 and paragraph (e)(3)(ii) of Rule 18a–6, as proposed to be amended. 73 See paragraph (f)(3)(iii) of Rule 17a–4, as proposed to be amended (providing that a brokerdealer must ‘‘[m]aintain a backup electronic recordkeeping system that meets the other requirements of this paragraph (f) and that retains the records required to be maintained and preserved pursuant to §§ 240.17a–3 and 240.17a–4 in accordance with this section’’) and paragraph (e)(3)(iii) of Rule 18a–6, as proposed to be amended (providing that an SBS Entity must ‘‘[m]aintain a backup electronic recordkeeping system that meets PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 Under the proposal, the broker-dealer or SBS Entity would need to have a second electronic recordkeeping system that preserves a second set of records that can be accessed and examined if the primary electronic recordkeeping system storing the primary set of records is disrupted, malfunctions, or otherwise becomes inaccessible. The second electronic recordkeeping system would serve as a redundant source from which to retrieve records if records cannot be retrieved from the primary recordkeeping system. In addition to facilitating examinations, the backup electronic recordkeeping system would promote the business continuity of the broker-dealer or SBS Entity in the event the primary electronic recordkeeping system is disrupted. This would benefit the firm and protect investors and other securities market participants. The second electronic recordkeeping system would need to meet the requirements of Rules 17a–4(f) and 18a–6(e), except that it would not need a backup recordkeeping system.74 The records stored on the backup electronic recordkeeping system would need to be preserved in accordance with record preservation requirements of Rules 17a– 4 or 18a–6, as applicable. Among other requirements, this would mean that the second set of records would need to be preserved for their required retention periods. Paragraph (f)(3)(iv) of Rule 17a–4 requires a broker-dealer to organize and index accurately all information maintained on both original and any duplicate storage media. Paragraph (f)(3)(iv)(A) requires a broker-dealer to have the indexes available at all times for examination by the staffs of the Commission or an SRO. Paragraph (f)(3)(iv)(B) requires that each index be duplicated and the duplicate copies be stored separately from the original copy of the index. Finally, paragraph (f)(3)(iv)(C) requires that the original and duplicate indexes be preserved for the time required for the indexed record. Similarly, paragraph (e)(3)(iv) of Rule 18a–6 requires an SBS Entity to organize and index accurately all information maintained on both original and any duplicate storage system. Paragraph (e)(3)(iv)(A) requires an SBS Entity to have the indexes available at the other requirements of this paragraph (e) and that retains the records required to be maintained and preserved pursuant to §§ 240.18a–5 and 240.18a–6 in accordance with this section’’). 74 Accordingly, to address this proposed amendment, the text of paragraph (f)(3)(iii) of Rule 17a–4, as proposed to be amended, and paragraph (e)(3)(iii) of Rule 18a–6, as proposed to be amended, refer to the ‘‘other’’ requirements of Rules 17a–4(f) and 18a–6(e), respectively. E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules all times for examination by the staff of the Commission. Paragraph (e)(3)(iv)(B) requires that each index be duplicated and the duplicate copies be stored separately from the original copy of the index. Finally, paragraph (e)(3)(iv)(C) requires that the original and duplicate indexes be preserved for the time required for the indexed record. As discussed above, some electronic recordkeeping systems may use means other than indexes to organize and locate records stored on the systems. Further, the references to indexes in Rule 17a–4(f), in part, reflect the widespread use of optical disks to store records electronically when the rule was adopted in 1997. Consequently, the Commission is proposing to amend these paragraphs of Rules 17a–4(f) and 18a–6(e) to impose obligations on broker-dealers and SBS Entities to organize and maintain information necessary to locate records stored on their electronic recordkeeping systems without mandating the use of indexes. Under the amendments, a broker-dealer or SBS Entity using an electronic recordkeeping system would need to organize and maintain information necessary to locate records maintained by the electronic recordkeeping system.75 Rule 17a–4(f)(3)(v) requires that the broker-dealer have in place an audit system providing for accountability regarding inputting of records required to be maintained and preserved pursuant to Rules 17a–3 and 17a–4 to electronic storage media and inputting of any changes made to every original and duplicate record maintained and preserved on electronic storage media. Paragraph (f)(3)(v)(A) requires a brokerdealer to have the results of the audit system available at all times for examination by the staffs of the Commission or an SRO. Finally, paragraph (f)(3)(v)(B) requires that the results of the audit be preserved for the time required for the audited records. Similarly, Rule 18a–6(e)(3)(v) requires that the SBS Entity have in place an audit system providing for accountability regarding inputting of records required to be maintained and preserved pursuant to Rules 18a–5 and 18a–6 to the electronic storage system and inputting of any changes made to every original and duplicate record maintained and preserved on the electronic storage system. Paragraph (e)(3)(v)(A) requires an SBS Entity to have the results of the audit system available at all times for examination by 75 See paragraph (f)(3)(iv) of Rule 17a–4 and paragraph (e)(3)(iv) of Rule 18a–6, as proposed to be amended. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 the staff of the Commission. Finally, Paragraph (e)(3)(v)(B) requires that the results of the audit be preserved for the time required for the audited records. The Commission is proposing amendments to these paragraphs of Rules 17a–4 and 18a–6 that are designed to better clarify the obligations of the broker-dealer or SBS Entity. In particular, the current rules require an ‘‘audit system’’ that provides ‘‘accountability’’ regarding the inputting of records and changes to records to the electronic storage media (in the case of Rule 17a–4) or electronic storage system (in the case of Rule 18a–6).76 The proposed amendments would establish specific elements of information relating to electronic records for which the broker-dealer would be required to establish an auditable system of controls. In particular, the Commission is proposing to replace the existing requirement with a requirement that the broker-dealer or SBS Entity have in place an auditable system of controls that records, among other things: (1) Each input, alteration, or deletion of a record; (2) the names of individuals inputting, altering, or deleting a record; and (3) the date and time such individuals input, altered, or deleted the record.77 As used in the proposed text, the phrase ‘‘auditable system of controls’’ would mean a system of controls that is documented and can be audited by internal or external examiners to determine whether the controls are operating as would be required by the rule. The objective of these proposed requirements is to identify a uniform set of information relating to electronic records for which the broker-dealer or SBS Entity would have responsibility and that could be used to examine whether the system is operating in conformance with the requirements of the proposed rule (e.g., if the electronic recordkeeping system is using the audit-trail requirement, that it is preserving records in a manner that allows the original record to be recreated if overwritten, erased, or otherwise altered). The remaining amendments to these paragraphs would be designed to incorporate the concept of a system of controls that tracks this information. In this regard, the broker-dealer or SBS Entity would need to be able to produce a record of the results of the audit of the system of controls for examination by the staffs of the Commission, SROs, and 76 See paragraph (f)(3)(v) of Rule 17a–4 and paragraph (e)(3)(v) of Rule 18a–6. 77 See paragraph (f)(3)(v)(A) of Rule 17a–4 and paragraph (e)(3)(v)(A) of Rule 18a–6, as proposed to be amended. PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 68309 state securities regulators, as applicable.78 This would mean the firm would need to be able to produce a record of: (1) Each input, alteration, or deletion of a record; (2) the names of individuals inputting, altering, or deleting a record; and (3) the date and time such individuals input, altered, or deleted the record. In addition, the broker-dealer or SBS Entity would need to preserve the record of the results of the audit of the system of controls for the retention period required for the associated records.79 This would mean the firm would need to preserve the information discussed above for the required retention period of the record. Paragraph (f)(3)(vi) of Rule 17a–4 requires a broker-dealer to maintain, keep current, and provide promptly upon request by the staffs of the Commission or an SRO all information necessary to access records and indexes stored on the electronic storage media; or place in escrow and keep current a copy of the physical and logical file format of the electronic storage media, the field format of all different information types written on the electronic storage media and the source code, together with the appropriate documentation and information necessary to access records and indexes. Similarly, paragraph (e)(3)(vi) of Rule 18a–6 requires an SBS Entity to maintain, keep current, and provide promptly upon request by the staff of the Commission all information necessary to access records and indexes stored in the electronic storage system; or place in escrow and keep current a copy of the physical and logical file format of the electronic storage system, the field format of all different information types written on the electronic storage system and the source code, together with the appropriate documentation and information necessary to access records and indexes. The Commission is proposing to eliminate the escrow account option from these paragraphs for two reasons. First, this option is premised upon the use of electronic storage media such as optical disk technology. Second, it could pose cybersecurity risk to have this information held by a third party in escrow. The Commission is proposing to retain the requirement that the brokerdealer or SBS Entity maintain, keep current, and provide promptly upon request by the Commission, SROs, and state securities regulators, as applicable, 78 See paragraph (f)(3)(v)(B) of Rule 17a–4 and paragraph (e)(3)(v)(B) of Rule 18a–6, as proposed to be amended. 79 See paragraph (f)(3)(v)(C) of Rule 17a–4 and paragraph (e)(3)(v)(C) of Rule 18a–6, as proposed to be amended. E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 68310 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules all information necessary to access and locate records preserved by means of the electronic recordkeeping system.80 Paragraph (f)(3)(vii) of Rule 17a–4 provides that, for a broker-dealer exclusively using electronic storage media for some or all of its record preservation, at least one third party, who has access to and the ability to download information from the brokerdealer’s electronic storage media to any acceptable medium under Rule 17a–4, must file with the DEA for the brokerdealer certain undertakings. The required text of the undertakings are set forth in the rule. They require the third party to undertake: (1) To furnish promptly to the Commission, the broker-dealer’s SRO(s), and state securities regulators having jurisdiction over the broker-dealer (collectively, the ‘‘regulators’’), upon reasonable request, such information as is deemed necessary by the regulators to download information kept on the broker-dealer’s electronic storage media to any medium acceptable under Rule 17a–4; and (2) to take reasonable steps to provide access to information contained on the brokerdealer’s electronic storage media, including, as appropriate, arrangements for the downloading of any record required to be maintained and preserved by the broker-dealer pursuant to Rules 17a–3 and 17a–4 in a format acceptable to the regulators. The rule further provides that these arrangements must provide specifically that in the event of a failure on the part of a broker-dealer to download the record into a readable format and after reasonable notice to the broker-dealer, upon being provided with the appropriate electronic storage medium, the third party will undertake to do so, as the regulators may request. The Commission proposed similar requirements for Rule 18a–6(e).81 When adopting the rule, the Commission noted that commenters stated that the requirement ‘‘was outdated in light of the changed technological environment’’ and that providing a third party access to electronic recordkeeping systems and client information ‘‘needlessly exposes firms to data leakage and cybersecurity threats.’’ 82 The Commission stated that any change to the broker-dealer electronic storage provisions should be addressed in a separate regulatory initiative where the Commission intends to consider 80 See paragraph (f)(3)(vi) of Rule 17a–4 and paragraph (e)(3)(vi) of Rule 18a–6, as proposed to be amended. For the reasons discussed above, the proposed rule text does not refer to indexes. 81 See SBSD/MSBSP Recordkeeping Proposing Release, 79 FR at 25313. 82 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68569. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 electronic storage media issues in a broader context, including with respect to other market participants.83 For these reasons, the Commission did not include these third-party access and undertakings requirements in Rule 18a– 6(e). The Commission preliminarily believes it is appropriate to eliminate the third-party access and undertakings requirements for the reasons discussed above. The Commission also preliminarily believes that the access and undertakings requirements may continue to serve a useful purpose. Electronic records may be held in a highly secure manner to address cybersecurity risks. For example, the records may be encrypted and access to them likely will require passwords and other forms of authentication. Therefore, producing them may require the cooperation of an individual who has the requisite knowledge to access the electronic recordkeeping system and retrieve the records stored on it. The access and undertakings requirements would be designed to provide a backup method for regulators to access records of a broker-dealer when the firm is either unable or unwilling to furnish records that the Commission and other securities regulators are entitled to examine pursuant to the Exchange Act and rules thereunder.84 For example, there may be situations, such as when a broker-dealer is failing and customer assets are at risk, when prompt access to the records is critical to protecting investors. In this case, relying on access and undertakings requirements may result in the records being produced more promptly than relying solely on 83 Id. 84 Paragraph (i) of Rule 17a4 has a similar undertaking requirement. See 17 CFR 240.17a–4(i). In particular, it provides, in pertinent part, that if the records required to be maintained and preserved pursuant to the provisions of Rules 17a– 3 and 17a–4 are prepared or maintained by a thirdparty, the third party must file with the Commission a written undertaking in form acceptable to the Commission, signed by a duly authorized person. Id. The rule further provides that the undertaking must include the following provision: ‘‘[w]ith respect to any books and records maintained or preserved on behalf of [BD], the undersigned hereby undertakes to permit examination of such books and records at any time or from time to time during business hours by representatives or designees of the Securities and Exchange Commission, and to promptly furnish to said Commission or its designee true, correct, complete and current hard copy of any or all or any part of such books and records.’’ Id. See also Recordkeeping by Brokers and Dealers, Exchange Act Release No. 13962 (Sept. 15, 1977), 42 FR 47551, 47552 (Sept. 21, 1977) (Paragraph (i) of Rule 17a–4 was adopted ‘‘to assure the accessibility of broker-dealer records in situations where, for example, a service bureau refuses to surrender the records due to nonpayment of fees.’’). PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 other remedies for the firm’s failure to produce the records.85 For these reasons, the Commission is proposing to amend Rule 17a–4(f) to require at all times that a senior officer of the broker-dealer, who has independent access to and the ability to provide the records, execute the undertakings.86 This would mean that 85 The proposed access and undertakings requirements would not require actions that contravene any provision of otherwise applicable law or actions beyond reasonable steps. 86 See paragraph (f)(3)(vii) of Rule 17a–4, as proposed to be amended. In addition to this amendment and the amendments discussed below, the Commission is proposing to amend the text of the access and undertakings requirements in the following ways: (1) The introductory text of paragraph (f)(3)(vii) would be modified to make a senior officer obligated to provide access to the records and the undertakings, and to conform to the proposed introductory text to paragraph (f)(3) by replacing the phrase ‘‘For every member, broker or dealer exclusively using electronic storage media for some or all of its record preservation under this section, at least one third party (the undersigned), who has access to and the ability to download information from the member’s, broker’s or dealer’s electronic storage media to any acceptable medium under this section, must file with the designated examining authority for the member, broker or dealer the following undertakings with respect to such records:’’ with the phrase ‘‘Have at all times a senior officer of the member, broker, or dealer (hereinafter, the ‘‘undersigned’’), who has independent access to and the ability to provide records maintained and preserved on the electronic recordkeeping system, file with the designated examining authority for the member, broker or dealer the following undertakings with respect to such records:’’; (2) throughout the text of the undertaking references to the member, broker, or dealer would be replaced with bracketed references to insert the name of the member, broker, or dealer; (3) the first sentence of the undertakings would be modified to conform to proposed changes to Rule 17a–4(f) discussed above and below by replacing the last phrase in the sentence that reads ‘‘to download information kept on the member’s, broker’s or dealer’s electronic storage media to any medium acceptable under § 240.17a–4’’ with the phrase ‘‘and to download copies of a record and its audit trail (if applicable) preserved by means of an electronic recordkeeping system of [Name of the Member, Broker, or Dealer] into both a human readable format and a reasonably usable electronic format in the event of a failure on the part of [Name of the Member, Broker, or Dealer] to download a requested record or its audit trail (if applicable);’’ (4) the second sentence of the undertakings would be modified to conform to proposed changes to Rule 17a–4(f) discussed above by replacing the first phrase of the sentence that reads ‘‘Furthermore, the undersigned hereby undertakes to take reasonable steps to provide access to information contained on the member’s, broker’s or dealer’s electronic storage media, including, as appropriate, arrangements for the downloading of any record’’ with the phrase ‘‘Furthermore, the undersigned hereby undertakes to take reasonable steps to provide access to the information preserved by means of an electronic recordkeeping system of [Name of the Member, Broker, or Dealer], including, as appropriate, downloading any record;’’ and (5) the third sentence of the undertakings would be modified to conform to proposed changes to Rule 17a–4(f) discussed above by replacing it with the following sentence ‘‘Specifically, the undersigned will take reasonable steps that, in the event of a failure on the part of [Name of the Member, Broker, or Dealer] to download the record into a human readable E:\FR\FM\01DEP2.SGM 01DEP2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 the broker-dealer must at all times have at least one senior officer who has independent access to and the ability to provide the records to the regulators, and that officer would need to execute the required undertakings. Independent access would mean the senior officer has the knowledge, credentials, and information necessary to access and provide the records without having to rely on other individuals at the firm. Therefore, under the proposed rule, if the senior officer that executed the undertaking is unable or will no longer serve in that capacity at the firm, a different senior officer would have immediately to execute and deliver the undertaking. The objective is to have a senior officer at all times who can access and provide the records to the Commission and other securities regulators provide the undertaking. The Commission preliminarily believes this approach would address cybersecurity and trade secret concerns about requiring a third party to fulfill these responsibilities and, at the same time, provide the Commission and other securities regulators with a means to obtain records if the broker-dealer refuses to produce them in the normal course. In this regard, the Commission is proposing to modify the first undertaking so that it is triggered if the broker-dealer fails to provide records and, if applicable, associated audit trails stored on the electronic recordkeeping system. As proposed, the senior officer would need to undertake to furnish promptly to the regulators, upon reasonable request, such information as is deemed necessary by the regulators, to download copies of a record and its audit trail (if applicable) kept by means of an electronic recordkeeping system by the broker-dealer into both a human readable format and a reasonably usable electronic format in the event of a failure on the part of the broker-dealer to download a requested record or its audit trail (if applicable). This modification would be intended to limit the senior officer’s obligations to circumstances where employees or other officers of the broker-dealer are either unwilling or unable to access and download a requested record or its audit trail, when applicable. In the normal format or a reasonably usable electronic format and after reasonable notice to [Name of the Member, Broker, or Dealer], the undersigned will download the record into a human readable format or a reasonably usable electronic format at the request of the staff of the staffs of the Commission, any selfregulatory organization of which [Name of the Member, Broker, or Dealer] is a member, or any State securities regulator having jurisdiction over [Name of the Member, Broker, or Dealer].’’ VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 course, the Commission expects brokerdealers would produce the records to the regulators without the need of the senior’s officer’s intervention. The proposed amendments to Rule 18a–6(e) would similarly require a senior officer of the SBS Entity, who has independent access to and the ability to provide the records, to execute undertakings consistent with the undertakings that would be required pursuant to Rule 17a–4(f), as proposed to be amended.87 However, the undertakings would need to be filed with the Commission (rather than a DEA) because SBS Entities do not have a DEA. F. Requirements for Broker-Dealers Using Micrographic Media To Preserve Records As discussed above, the Commission believes most broker-dealers do not use micrographic media to preserve their records. However, because some brokerdealers may use this technology, the proposed amendments to Rule 17a–4(f) would preserve this recordkeeping option for broker-dealers.88 The current requirements for broker-dealers using micrographic media are set forth in paragraphs (f)(3)(i) through (iv) of Rule 17a–4, which also set forth requirements for broker-dealers using electronic storage media. As discussed above, paragraph (f)(3) of Rule 17a–4 would be amended to set forth requirements solely for broker-dealers using electronic recordkeeping systems. Moreover, the current provisions of that paragraph would be modified to specifically address electronic recordkeeping systems. Consequently, they would not address the unique characteristics of micrographic media. For these reasons, the Commission is proposing to move the requirements for broker-dealers using micrographic media to new paragraph (f)(4) of Rule 17a–4. G. Requirement To Produce Electronic Records in a Reasonably Usable Electronic Format The Commission is also proposing to amend Rule 17a–4(j) to require that a broker-dealer must furnish any record and its audit trail (if applicable) preserved electronically pursuant to Rule 17a–4(f) in a reasonably usable electronic format, if requested by a representative of the Commission.89 As 87 See paragraph (e)(3)(vii) of Rule 18a–6, as proposed to be amended. 88 See paragraph (f)(4) of Rule 17a–4, as proposed to be amended. 89 See paragraph (j) of Rule 17a–4, as proposed to be amended. Paragraph (j) of Rule 17a–4 requires, among other things, that a broker-dealer promptly PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 68311 discussed above, a reasonably usable electronic format would be a format that is common and compatible with commonly used systems for accessing and reading electronic records. The Commission similarly is proposing to amend Rule 18a–6(g) to require SBS Entities to furnish any record preserved electronically pursuant to Rule 18a–6(e) in a reasonably usable electronic format, if requested by a representative of the Commission.90 III. Request for Comment The Commission is requesting comments from all members of the public on all aspects of the proposed amendments to Rules 17a–4 and 18a–6. Commenters are requested to provide empirical data in support of any arguments or analyses. With respect to any comments, the Commission notes that they are of the greatest assistance to its rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments and by alternatives to the Commission’s proposals where appropriate. In addition to this general request for comment, the Commission is requesting comment on the following specific aspects of the proposals: 1. Is the proposal to replace the term ‘‘electronic storage media’’ in Rule 17a– 4(f) and the term ‘‘electronic storage media’’ in Rule 18a–6(e) with the term ‘‘electronic recordkeeping system’’ appropriate? 91 If so, explain why. If not, explain why not. Is there a more appropriate term? If so, identify it and explain why it would be more appropriate. 2. Is the definition of ‘‘electronic recordkeeping system’’ in Rules 17a–4(f) and 18a–6(e), as proposed to be amended, appropriate? 92 If so, explain why. If not, explain why not. Is there a more accurate definition? If so, provide it and explain why it would be more accurate. 3. Is there a reason to retain the notification (including the 90-day notification) and representation requirements with respect to employing an electronic recordkeeping system in furnish to a representative of the Commission ‘‘legible’’ copies of records. Consequently, the rule already requires the broker-dealer to produce human readable copies of records. 90 Paragraph (g) of Rule 18a–6 requires, among other things, that an SBS Entity promptly furnish to a representative of the Commission ‘‘legible’’ copies of records. Consequently, the rule already requires the broker-dealer to produce human readable copies of records. 91 See section II.A. of the release (discussing these proposed amendments). 92 See section II.B. of the release (discussing these proposed amendments). E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 68312 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules Rule 17a–4(f)? 93 If so, explain why. If not, explain why not. If the requirements should be retained, should analogous requirements be added to Rule 18a–6(e)? If so, explain why. If not, explain why not. 4. Is the proposal to limit the requirements for electronic recordkeeping systems (including the audit-trail and WORM requirements) in paragraph (e)(2) of Rule 18a–6 to nonbank SBS Entities appropriate? 94 If so, explain why. If not, explain why not. Would these requirements conflict with requirements and guidance of the U.S. prudential regulators governing the use of electronic recordkeeping systems by bank SBS Entities? If so, please identify the requirements and guidance of the prudential regulators that would conflict with the proposed requirements of paragraph (e)(2) of Rule 18a–6 and explain how they would conflict with those proposed requirements. Would it be appropriate to apply certain of the requirements of paragraph (e)(2) of Rule 18a–6 to bank SBS Entities? For example, would it be appropriate to apply the requirements other than the audit-trail and WORM requirements? If so, explain why. If not, explain why not. 5. Would the proposed rule text setting forth the audit-trail requirement achieve the Commission’s objective of imposing an obligation that the electronic recordkeeping system be configured to permit the re-creation of an original record if it is altered, overwritten, or erased? 95 If so, explain why. If not, explain why not and suggest alternative rule text that would achieve this objective. 6. Would the proposed rule text requiring that the electronic recordkeeping system verify automatically the quality and accuracy of the electronic storage system storage and retention process achieve the Commission’s objective that the electronic recordkeeping system be configured to ensure that when an original record is added to the electronic recordkeeping system it is completely and accurately captured in the system? 96 If so, explain why. If not, explain why not and suggest alternative rule text that would achieve this objective. 7. Is the proposed rule text requiring that the electronic recordkeeping system serialize the original and duplicate units of the storage media, and time-date for the required period of retention the information placed on such electronic storage media, if applicable, appropriate? 97 If so, explain why. If not, explain why not. Does this requirement as it exists today only apply to electronic recordkeeping systems that use optical disk technology? If so, explain why. If not, identify other electronic recordkeeping systems for which serializing original and duplicate units of the storage media, and timedating for the required period of retention the information placed on the electronic storage media is appropriate and done under current practices. 8. Is the proposed rule text requiring that the electronic recordkeeping system have the capacity to readily download and transfer copies of a record and its audit trail (if applicable) in both a human readable format and a reasonably usable electronic format appropriate? 98 If so, explain why. If not, explain why not and suggest alternative rule text. What types of electronic record formats should be considered reasonably usable? Do broker-dealers and SBS Entities use unique (i.e., proprietary) electronic formats? If so, can those electronic formats be converted into electronic formats that are reasonably usable? 9. Is the proposed rule text requiring that the electronic recordkeeping system have the capacity to readily download and transfer the information needed to locate the electronic record sufficiently clear? 99 If so, explain why. If not, explain why not. For example, what type of information is necessary to locate a specific record maintained and preserved on an electronic recordkeeping system? Are indexes used? If so, how? Are data fields used? If so, how? Should the rule be more specific in identifying the type of information necessary to locate a specific record maintained and preserved on an electronic recordkeeping system? If so, explain how and suggest alternative rule text. 10. Is the proposed rule text requiring the broker-dealer or SBS Entity to at all times have available, for examination by the regulators, facilities for immediate production of records preserved by means of the electronic recordkeeping system and for producing copies of those records appropriate? 100 If so, explain why. If not, explain why not and suggest alternative rule text. What type of facilities would be needed to meet this requirement? 11. Is the proposed rule text requiring the broker-dealer or SBS Entity to be ready at all times to provide immediately any record or information needed to locate records stored by means of the electronic recordkeeping system that the regulators may request appropriate? 101 If so, explain why. If not, explain why not and suggest alternative rule text. 12. Is the proposed rule text requiring the broker-dealer or SBS Entity to maintain a backup electronic recordkeeping system appropriate and necessary? 102 If so, explain why. If not, explain why not. For example, do broker-dealers maintain a backup electronic recordkeeping system with respect to the electronic records they preserve for business purposes? Are their other measures that broker-dealers take with respect to preserving their business-purpose electronic records that are designed to maintain access to the records if the electronic recordkeeping systems fails? If so, please identify and describe them and suggest how they could be incorporated into a final rule. 13. Is the proposed rule text requiring the broker-dealer or SBS Entity to organize and maintain information necessary to locate records maintained by the electronic recordkeeping system appropriate? 103 If so, explain why. If not, explain why not and suggest alternative rule text. 14. Is the proposed rule text requiring a broker-dealer or SBS Entity using an electronic recordkeeping system to have in place an auditable system of controls that records, among other things: The names of persons inputting, altering, or deleting a record; and the date and time such persons input, altered, or deleted the record appropriate? 104 For example, is this the type of information that could be used to examine whether the system is operating in conformance with the requirements of the proposed rule (e.g., if the electronic recordkeeping system is adhering to the audit-trail requirement, that it is preserving records in a manner that allows the original record to be recreated if overwritten, erased, or otherwise altered)? If so, explain why. If not, explain why not and suggest alternative rule text. For example, is 93 See section II.C. of the release (discussing these proposed amendments). 94 See section II.D. of the release (discussing these proposed amendments). 95 See section II.D. of the release (discussing these proposed amendments). 96 See section II.D. of the release (discussing these proposed amendments). 97 See section II.D. of the release (discussing these proposed amendments). 98 See section II.D. of the release (discussing these proposed amendments). 99 See section II.D. of the release (discussing these proposed amendments). 100 See section II.E. of the release (discussing these proposed amendments). 101 See section II.E. of the release (discussing these proposed amendments). 102 See section II.E. of the release (discussing these proposed amendments). 103 See section II.E. of the release (discussing these proposed amendments). 104 See section II.E. of the release (discussing these proposed amendments). VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules there other information that would be necessary to achieve the objective of the requirement? If so, please identify it. Should the Commission add a requirement for a periodic audit to confirm that the auditable system of controls is working as appropriate? If so, should the required audit be internal or external? 15. Is the proposal to eliminate the requirement that a broker-dealer engage a third party with access to the firm’s electronic records who undertakes to provide them to the Commission and other securities regulators appropriate? 105 If so, explain why. If not, explain why not. Further, is the proposal to modify this requirement so that a senior officer of the broker-dealer must have access to the records and undertake to provide them to the Commission appropriate? If so, explain why. If not, explain why not. Should the Commission require that a second senior officer at all times have independent access to and the ability to provide the records and to execute the undertakings? If so, explain why. If not, explain why not. For example, would this increase insider cybersecurity risk compared to the proposed approach? Would switching from a third party to a senior officer reduce cybersecurity risk compared with the current third-party requirement? If so, explain why. If not, explain why not. Would switching to a senior officer provide the Commission and other securities regulators with adequate means to obtain records if the broker-dealer refuses to produce them in the normal course? If so, please explain. If not, explain why not. 16. What type of senior officer could fulfill the proposed access and undertakings requirements? For example, which senior officers have access to electronic recordkeeping systems? Are there any circumstances in which the senior officer would not be an associated person? Should the Commission specify which officers or officers with specific responsibilities and reporting lines that would be appropriate to provide the senior officer undertakings? If so, please identify them and explain why it would be appropriate for them to provide the undertakings. 17. Is the proposal to eliminate the option to place in escrow and keep current a copy of the physical and logical file format of the electronic storage media, the field format of all different information types written on the electronic storage media, and the source code, together with the 105 See section II.E. of the release (discussing these proposed amendments). VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 appropriate documentation and information necessary to access records and indexes, appropriate? If not, explain why. For example, do broker-dealers use this option? 18. Do broker-dealers or SBS Entities use micrographic media to store regulatory records? If not, should the Commission delete the option to use micrographic media in Rule 17a– 4(f)? 106 If so, should the Commission add an option to use micrographic media to Rule 18a–6(e)? Are the current requirements in Rule 17a–4(f) for broker-dealers using micrographic media consistent with this technology as it exists today? If so, explain why. If not, explain why not. Should the current requirements be updated? If so, explain how. 19. Should the Commission adopt a sunset provision after which time broker-dealers would no longer be able to use micrographic media? If so, explain why or why not. If not, please describe broker-dealers’ continued use of micrographic media to store records. Would any broker-dealers incur costs in moving from micrographic media to paper or electronic storage media? If so, identify and explain the costs. Moreover, do broker-dealers continue to preserve records using paper, rather than electronic storage methods, to fulfill the record preservation requirements of Rule 17a–4? If so, please provide data as to the frequency of such use. 20. Are the proposed amendments to paragraphs (j) and (g) of Rules 17a–4 and 18a–6, respectively, that would require firms to furnish a record and its audit trail (if applicable) preserved on an electronic recordkeeping system pursuant to paragraph (e) of this section in a reasonably usable electronic format, if requested by a representative of the Commission, appropriate? 107 If not, explain why. IV. Economic Analysis The Commission is mindful of the economic effects, including the costs and benefits, of the proposed amendments. Section 3(f) of the Exchange Act provides that whenever the Commission is engaged in rulemaking pursuant to the Exchange Act and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will 106 See section II.F. of the release (discussing these proposed amendments). 107 See section II.G. of the release (discussing these proposed amendments). PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 68313 promote efficiency, competition, and capital formation.108 In addition, Section 23(a)(2) of the Exchange Act requires the Commission, when making rules under the Exchange Act, to consider the impact such rules would have on competition.109 Exchange Act Section 23(a)(2) also provides that the Commission shall not adopt any rule which would impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The analysis below addresses the likely economic effects of the proposed amendments, including the anticipated and estimated benefits and costs of the amendments and their likely effects on efficiency, competition, and capital formation. The Commission also discusses the potential economic effects of certain alternatives to the approaches taken in this proposal. Many of the benefits and costs discussed below are difficult to quantify. For example, the Commission cannot quantify the number of entities that may already have electronic recordkeeping systems compliant with the proposed requirements; the extent to which some broker-dealers and SBS Entities may need to upgrade existing electronic recordkeeping systems to meet the proposed audit-trail requirement and costs thereof; or the degree to which broker-dealers and SBS Entities may currently pass along recordkeeping costs to customers and counterparties. While the Commission has attempted to quantify economic effects where possible, much of the discussion of economic effects is qualitative in nature. A. Baseline To assess the economic effects of the proposed amendments, the Commission is using as the baseline the broker-dealer and security-based swap markets as they exist at the time of this release, including applicable rules the Commission has already adopted, but excluding rules the Commission has proposed but not yet finalized. With respect to broker-dealers, the regulatory baseline includes Rules 17a– 4(f) and (j). In addition, as discussed above, the Commission has also issued interpretations of Rule 17a–4(f) for broker-dealers.110 With respect to SBS 108 See 15 U.S.C. 78c(f). 15 U.S.C. 78w(a)(2). 110 See Section II.D discussing Rule 17a–4(f) Interpretation. See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68568. As discussed above, the Commission would interpret the WORM requirement as set forth in the text of paragraph (e)(2)(i)(B) of Rule 18a–6, as proposed to be amended, consistently with how the WORM 109 See E:\FR\FM\01DEP2.SGM Continued 01DEP2 68314 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules Entities, the regulatory baseline includes the statutory provisions pursuant to the Dodd-Frank Act and rules adopted by the Commission, compliance with which is required. This includes rules adopted by the Commission in the following adopting releases: The intermediary definitions release; 111 cross-border release; 112 security-based swap entity registration release; 113 U.S. activity release; 114 business conduct release; 115 trade acknowledgment release; 116 capital, margin, and segregation release; 117 and the recordkeeping and reporting release adopting Rules 18a–6(e) and (g).118 The following sections discuss available data about the security-based swap market, affected SBS Entities, dual registrants, other security-based swap market participants, participant domiciles, and broker dealer activity. 1. Broker-Dealers The market for broker-dealer services encompasses a relatively small set of large and medium sized broker-dealers and thousands of smaller broker-dealers competing for niche or regional segments of the market.119 The market for broker-dealer services includes many different markets for a variety of services related to the securities business, including (1) managing orders for customers and routing them to various trading venues; (2) providing advice to customers that is in connection with and reasonably related to their primary business of effecting securities transactions; (3) holding customers’ funds and securities; (4) handling clearance and settlement of trades; (5) intermediating between customers and carrying/clearing brokers; (6) dealing in corporate debt and equities, government bonds, and municipal bonds, among other securities; (7) privately placing securities; and (8) effecting transactions in mutual funds that involve transferring funds directly to the issuer. Some broker-dealers may specialize in just one narrowly defined service, while others may provide a wide variety of services. Based on an analysis of FOCUS filings as of December 2020, there were approximately 3,551 registered brokerdealers with over 186 million customer accounts.120 In total, these brokerdealers have over $5 trillion in total assets as reported on Form X–17A–5.121 More than two-thirds of all brokerdealer assets and more than one-third of all customer accounts are held by the 19 largest broker-dealers, as shown in Table 1.122 Of the broker-dealers registered with the Commission as of December 2020, 502 broker-dealers were dually registered as investment advisers.123 TABLE 1—REGISTERED BROKER-DEALERS AS OF DECEMBER 2020 Size of broker-dealer (total assets) Total number of BDs Number of dually registered BDs * Cumulative total assets ($ bln) Cumulative number of customer accounts >$50 billion ....................................................................................................... $1 billion to $50 billion ..................................................................................... $500 million to $1 billion .................................................................................. $100 million to $500 million ............................................................................. $10 million to $100 million ............................................................................... $1 million to $10 million ................................................................................... <$1 million ........................................................................................................ 19 122 25 129 507 1,047 1,702 10 24 5 31 98 194 140 3,450 1,519 17 27 18 3.7 0.5 67,178,360 107,003,611 639,425 932,529 9,771,667 383,646 13,481 Total .......................................................................................................... 3,551 502 5,036 185,922,719 lotter on DSK11XQN23PROD with PROPOSALS2 * For purposes of this table, a dually registered broker-dealer is registered with either the Commission or a state as an investment adviser and a broker-dealer. The Commission preliminarily estimates that 45 broker-dealers may be dually registered with the CFTC as futures commission merchants as of December 31, 2020.124 In addition to the above estimates of affected broker-dealers, over-the-counter (‘‘OTC’’) derivatives dealers will also be requirement as set forth in the text of paragraph (f)(2)(ii)(A) of Rule 17a–4 was interpreted by the Commission in 2019 and 2003. 111 See Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant,’’ Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012). 112 See Application of ‘‘Security-Based Swap Dealer’’ and ‘‘Major Security-Based Swap Participant’’ Definitions to Cross-Border SecurityBased Swap Activities, Exchange Act Release No. 72372 (June 25, 2014, 79 FR 47278, 47359 (Aug. 12, 2014). 113 See Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 75611 (Aug. 5, 2015), 80 FR 48964, 48989 (Aug. 14, 2015). 114 See Security-Based Swap Transactions Connected With a Non-U.S. Person’s Dealing Activity That Are Arranged, Negotiated, or Executed by Personnel Located in a U.S. Branch or Office of an Agent; Security-Based Swap Dealer De Minimis Exception, Exchange Act Release No. 77104 (Feb. 10, 2016), 81 FR 8598 (Feb. 19, 2016). 115 See Business Conduct Standards for SecurityBased Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 30081 (May 13, 2019). 116 See Trade Acknowledgment and Verification of Security-Based Swap Transactions, Exchange Act Release No. 78011 (June 8, 2016), 81 FR 39808, 30143–44 (June 17, 2016). 117 See SBSD/MSBSP Capital, Margin, and Segregation Adopting Release, 84 FR 43872. 118 See SBSD/MSBSP Recordkeeping Proposing Release, 84 FR 68550. 119 See Regulation Best Interest Adopting Release, 84 FR at 33406. For simplification, the Commission presents this analysis as if the market for brokerdealer services encompasses one broad market with multiple segments, even though, in terms of competition, it could also be discussed in terms of numerous interrelated markets. 120 The data is obtained from FOCUS filings as of December 2020. There may be a double-counting of customer accounts among, in particular, the larger broker-dealers as they may report introducing broker-dealer accounts as well in their role as clearing broker-dealers. Customer Accounts includes both broker-dealer and investment adviser accounts for dual-registrants. 121 Assets are estimated by Total Assets (allowable and non-allowable) from Part II of the FOCUS filings (Form X–17A–5 Part II and Part IIA, available at https://www.sec.gov/files/formx-17a-5_ 2.pdf) and correspond to balance sheet total assets for the broker-dealer. The Commission does not have an estimate of the total amount of customer assets for broker-dealers because that information is not included in FOCUS filings. The Commission estimates broker-dealer size from the total balance sheet assets as described above. 122 Approximately $4.97 trillion of total assets of broker-dealers (98.7%) are at broker-dealers with total assets in excess of $1 billion. 123 This estimate includes the number of brokerdealers who are also registered as state investment advisers. 124 Using FOCUS Report data as of December 31, 2020, there are 45 broker-dealers that report commodity futures account activity in ‘‘Part II: Customer’s Regulated Commodity Futures Accounts.’’ VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 E:\FR\FM\01DEP2.SGM 01DEP2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules affected by the proposed recordkeeping amendments. The Commission estimates that 5 registered OTC derivatives dealers will be impacted by the proposed amendments to Rule 17a– 4. 2. Security-Based Swap Markets: Activity and Participants i. Available Data From the SecurityBased Swap Market lotter on DSK11XQN23PROD with PROPOSALS2 The Commission’s understanding of the market is informed, in part, by available data on security-based swap transactions, though the Commission acknowledges that limitations in the data limit the extent to which it is possible to quantitatively characterize the market.125 Since this data does not cover the entire market, the Commission has analyzed market activity using a sample of transactions that includes only certain segments of the market. The Commission believes, however, that the data underlying this analysis provides reasonably comprehensive information regarding single-name credit default swap (‘‘CDS’’) transactions and the composition of the participants in the single-name CDS market. The Commission’s analysis of the current state of the security-based swap market is based on data obtained from the Depositary Trust & Clearing Corporation (‘‘DTCC’’) Derivatives Repository Limited Trade Information Warehouse (‘‘TIW’’), especially data regarding the activity of market participants in the single-name CDS market during the period from 2008 to 2021.126 Although the definition of security-based swaps is not limited to single-name CDS,127 the Commission believes that the single-name CDS data is sufficiently representative of the 125 The Commission also relies on qualitative information regarding market structure and evolving market practices provided by commenters and the knowledge and expertise of Commission staff. 126 In prior releases, the Commission has examined data for other time periods. For example, in the business conduct standards adopting release, the Commission presented an analysis of TIW data for November 2006 through December 2014. While the exact numbers of various groups of transacting agents and account holders in that analysis differ from the figures reported in this section (for a longer time period), the Commission does not observe significant structural differences in market participation. Compare 81 FR at 30102 (Tables 1 and 2), with Tables 1 and 2 below. 127 While other repositories may collect data on transactions in total return swaps on equity and debt, the Commission does not currently have access to such data for these products (or other products that are security-based swaps). Additionally, the Commission explains below that data related to single-name CDS provides reasonably comprehensive information for the purpose of this analysis. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 market to inform our analysis of the current security-based swap market. According to data published by the Bank for International Settlements (‘‘BIS’’), the global notional amount outstanding in single-name CDS was approximately $3.5 trillion,128 in multiname index CDS was approximately $4.5 trillion, and in multi-name, nonindex CDS was approximately $347 billion.129 The total gross market value outstanding in single-name CDS was approximately $77 billion, and in multiname CDS instruments was approximately $125 billion.130 The global notional amount outstanding in equity forwards and swaps as of December 2020 was $3.6 trillion, with total gross market value of $321 billion.131 ii. Affected SBS Entities Final SBS Entity registration rules have been adopted and compliance was required as of November 1, 2021.132 As of November 9, 2021, there are 41 entities registered with the Commission as SBSDs, and no entities have registered as MSBSPs.133 Firms that act as dealers play a central role in the security-based swap market. 128 The global notional amount outstanding represents the total face amount used to calculate payments under outstanding contracts. The gross market value is the cost of replacing all open contracts at current market prices. 129 See BIS, Semi-annual OTC derivatives statistics at December 2020, Table D5.2, available at https://stats.bis.org/statx/srs/table/d5.2 (accessed Aug. 18, 2021). 130 See id. 131 These totals include swaps and security-based swaps, as well as products that are excluded from the definition of ‘‘swap,’’ such as certain equity forwards. See OTC, equity-linked derivatives statistics, Table D5.1, available at https:// stats.bis.org/statx/srs/table/d5.1 (accessed Aug. 18, 2021). For the purposes of this analysis, the Commission assumes that multi-name index CDS are not narrow-based index CDS and therefore, do not fall within the security-based swap definition. See 15 U.S.C. 78c(a)(68)(A); see also Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48208. The Commission also assumes that all instruments reported as equity forwards and swaps are security-based swaps, potentially resulting in underestimation of the proportion of the securitybased swap market represented by single-name CDS. Therefore, when measured on the basis of gross notional outstanding single-name CDS contracts appear to constitute roughly 49% of the security-based swap market. Although the BIS data reflects the global OTC derivatives market, and not just the U.S. market, the Commission has no reason to believe that these ratios differ significantly in the U.S. market. 132 See Key Dates for Registration of SecurityBased Swap Dealers and Major Security-Based Swap Participants, available at: https:// www.sec.gov/page/key-dates-registration-securitybased-swap-dealers-and-major-security-basedswap-participants. 133 See section V.C. of this release (discussing the number of SBS Entities that would be subject to the proposed rules). PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 68315 Based on an analysis of 2020 singlename CDS data in TIW, accounts of dealers intermediated transactions with a gross notional amount of approximately $1.99 trillion, with approximately 55 percent of the gross notional intermediated by the top five dealer accounts.134 iii. Other Markets and Dual Registrants The numerous financial markets are integrated, often attracting the same market participants that trade across corporate bond, swap, and securitybased swap markets, among others. For example, persons who will register as SBS Entities are likely also to be engaged in swap activity. In part, this overlap reflects the relationship between single-name CDS contracts, which are security-based swaps, and index CDS contracts, which may be swaps or security-based swaps. A single-name CDS contract covers default events for a single reference entity or reference security. Index CDS contracts and related products make payouts that are contingent on the default of index components and allow participants in these instruments to gain exposure to the credit risk of the basket of reference entities that comprise the index, which is a function of the credit risk of the index components. A default event for a reference entity that is an index component will result in payoffs on both single-name CDS written on the reference entity and index CDS written on indices that contain the reference entity. Because of this relationship between the payoffs of single-name CDS and index CDS products, prices of these products depend upon one another,135 creating hedging opportunities across these markets. These hedging opportunities mean that participants that are active in one market are likely to be active in the other. Commission staff analysis of approximately 4,149 TIW accounts that participated in the market for singlename CDS in 2020 revealed that approximately 3,096 of those accounts, or 75 percent, also participated in the market for index CDS. Of the accounts that participated in both markets, data regarding transactions in 2020 suggests that, conditional on an account transacting in notional volume of index CDS in the top third of accounts, the 134 The Commission staff analysis of TIW transaction records indicates that approximately 99% of single-name CDS price-forming transactions in 2020 involved an ISDA-recognized dealer. 135 ‘‘Correlation’’ typically refers to linear relationships between variables; ‘‘dependence’’ captures a broader set of relationships that may be more appropriate for certain swaps and securitybased swaps. See, e.g., George Casella & Roger L. Berger, Statistical Inference 171 (2nd ed. 2002). E:\FR\FM\01DEP2.SGM 01DEP2 68316 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules probability of the same account landing in the top third of accounts in terms of single-name CDS notional volume is approximately 61 percent; by contrast, the probability of the same account landing in the bottom third of accounts in terms of single-name CDS notional volume is only 11 percent. Of the 25 SBSDs subject to Rule 18a– 6(e), 24 are dually registered with the CFTC as swap dealers and are therefore subject to CFTC requirements for entities registered with the CFTC as swap.136 Additionally, there are six SBSDs that are already or will be subject to Rule 17a–4. Further, of 41 entities registered as SBSDs, 26 have a prudential regulator. 3. Recordkeeping Practices of Market Participants lotter on DSK11XQN23PROD with PROPOSALS2 Notwithstanding the Commission’s 2003 and 2019 interpretations of the WORM requirement (i.e., that it can be met with software solutions) described above,137 the Commission understands that some affected broker-dealers maintain electronic recordkeeping systems used daily for business purposes and separate electronic recordkeeping systems used to meet the WORM requirement. The Commission does not have data regarding the number of affected broker-dealers that maintain separate electronic recordkeeping systems for these purposes or data sufficient for the Commission to evaluate the likelihood that affected broker-dealers maintain separate electronic recordkeeping systems for business purposes that do or do not satisfy the WORM requirement. As a result, the Commission cannot estimate the frequency with which separate electronic recordkeeping systems are maintained for these purposes. The Commission understands that third-party vendors developed softwarebased solutions designed to meet the WORM requirement of Rule 17a–4(f).138 136 See section VI.F. of this release (discussing the CFTC’s electronic recordkeeping rules). See also section V.C. of this release (discussing the number of SBSDs that would be subject to the proposed rules). 137 See sections I.B.1. and II.D. of this release (discussing the interpretations and broker-dealers’ response to them). 138 See, e.g., Global Relay, Global Relay Archive, available at: https://www.globalrelay.com/grservices/archive; Amazon, Protecting data with Amazon S3 Object lock, available at: https:// aws.amazon.com/blogs/storage/protecting-datawith-amazon-s3-object-lock/; Cohasset Associates, Compliance Assessment: Amazon Web Services (AWS) Simple Storage Service (S3), available at: https://d1.awsstatic.com/r2018/b/S3-Object-Lock/ Amazon-S3-Compliance-Assessment.pdf; Microsoft, Securities and Exchange Commission (SEC) Rule 17a–4(f) United States, available at: https:// VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 However, affected broker-dealers do not commonly use such record systems for business purposes: Broker-dealers have explained to Commission staff that the electronic recordkeeping systems used for business purposes are dynamic, updated constantly (e.g., with each new transaction or position), and easily accessible for retrieving records, whereas WORM databases are more akin to static ‘‘snapshots’’ of the records at a point in time and are less accessible for business purposes. As discussed in more detail above, the Commission preliminarily believes that affected broker-dealers generally deploy an electronic recordkeeping system that serves no purpose other than to hold records in a manner that meets the Commission’s regulatory requirements for electronic recordkeeping systems.139 The Commission also believes that some affected SBS Entities currently have systems complying with the electronic recordkeeping requirements under Rule 18a–6 as it presently stands, which does not include a WORM or audit-trail requirement.140 As discussed above, a number of affected entities are dually registered with the CFTC as swap dealers. Under the CFTC’s electronic recordkeeping rule, affected entities must configure their recordkeeping systems and have policies and procedures governing those systems that are designed to prevent records from being altered or erased. B. Benefits of the Proposed Amendments The proposed amendments are intended to modernize the SBS Entity and broker-dealer recordkeeping rules given technological changes over the last two decades. The Commission preliminarily believes that by specifying that nonbank SBS Entities 141 and docs.microsoft.com/en-us/compliance/regulatory/ offering-sec-17a-4. 139 See section II.D of this release (discussing broker-dealers’ use of WORM compliant electronic recordkeeping systems). 140 As noted above in section II.D. of this release, it is the Commission’s understanding that electronic recordkeeping systems used by nonbank SBS Entities as well as by broker-dealers for business purposes can be configured to meet the audit-trail requirement. 141 With respect to SBS Entities, the proposal would limit the electronic recordkeeping requirements to SBS Entities that do not have a prudential regulator in order to avoid subjecting bank SBS Entities to potentially differing requirements with respect to electronic record preservation. As discussed above, 26 SBS Entities have a prudential regulator (i.e., are bank SBS Entities). The exclusion of bank SBS Entities from the scope of the proposed electronic recordkeeping system requirements would reduce aggregate benefits and costs related to modifying electronic recordkeeping systems to conform to the proposed amendment to paragraph (e)(2) of Rule 18a–6. PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 broker-dealers may satisfy their electronic recordkeeping obligations through the WORM requirement or an audit-trail alternative, the proposed amendments may result in nonbank SBS Entities or broker-dealers updating electronic recordkeeping systems in ways that would lower compliance costs. For example, nonbank SBS Entities or broker-dealers may, among other things, reduce or eliminate duplicative compliance systems in circumstances where they currently maintain separate electronic recordkeeping systems primarily due to, as applicable, the WORM requirement or Rule 18a–6(e)’s electronic storage system requirements. The Commission expects that these reductions would primarily be realized by broker-dealers that may, for example, choose to adopt a single recordkeeping system that complies with the audit-trail requirement—for business and regulatory purposes. Below, the Commission estimates the reduction in initial and ongoing costs and burdens related to these proposals.142 These aggregate cost savings may be reduced by three factors. First, some affected entities may have already streamlined their regulatory electronic recordkeeping systems with systems used for business records consistent with the Commission interpretations described above. Second, some affected entities may elect to upgrade existing business recordkeeping systems to accommodate the proposed audit-trail alternative. The affected entities that choose to undertake such upgrades may do so if aggregate savings from eliminating redundant electronic recordkeeping systems outweigh the costs of buildout for existing systems. The Commission expects that these costs would primarily be realized by broker-dealers. However, potential buildout costs may decrease the cost savings from the proposal. Third, because the proposal would not require broker-dealers to make changes to recordkeeping systems that are currently compliant with the WORM requirement, they may choose not to make any changes to recordkeeping systems. Such broker-dealers may, for example, choose to continue maintaining separate recordkeeping systems for business purposes and for regulatory purposes. The proposal may also benefit customers and counterparties of brokerdealers and nonbank SBS Entities. Specifically, to the extent that broker142 See section V.D. of this release (discussing increases and decreases in costs and burdens relating to proposals for purposes of the Paperwork Reduction Act). E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules dealers and nonbank SBS Entities currently pass on part or all of their recordkeeping costs to their customers and counterparties, some of the above cost savings may flow through to customers and counterparties of brokerdealers and nonbank SBS Entities in the form of lower costs or greater availability of services. The extent to which cost savings are passed along to customers and counterparties will depend on several factors, including the price elasticity of the demand for broker-dealer and nonbank SBS Entity services, the substitutability of brokerdealers and nonbank SBS Entities, concentration in the broker-dealer and nonbank SBS Entity industries due to economies of scale, heterogeneity of broker-dealer and nonbank SBS Entity services, and market segmentation, among others. The proposal may also enhance Commission oversight of nonbank SBS Entities and broker-dealers. To the degree that the proposal may lead broker-dealers and nonbank SBS Entities to move to a single recordkeeping system for both business and regulatory purposes, and if affected entities direct compliance cost savings to investments in system improvements and maintenance, the reliability and efficiency of recordkeeping systems may increase. Moreover, the Commission preliminarily believes that the proposed audit-trail and WORM alternatives will provide flexibility for broker-dealers and nonbank SBS Entities, while still maintaining the essential ability of the Commission to access the entities’ records in the course of examinations or other activities. The Commission preliminarily believes that some of the proposed amendments may provide compliance efficiencies. For example, the proposed amendments related to the verification of completeness and accuracy of the processes for retaining records electronically may introduce time efficiencies in achieving compliance when an original record is added to the electronic recordkeeping system. Similarly, proposed amendments to provide additional specificity to the obligations relating to the auditable system of controls required by paragraph (f)(3)(v) and Rule 17a–4 and Rule paragraph (e)(3)(v) of Rule 18a–6 may introduce time and compliance efficiencies by lowering burdens on compliance professionals’ time. Further, the Commission preliminarily believes that the elimination of the notification and representation requirements from Rule 17a–4(f) would alleviate some VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 burden currently imposed on brokerdealers, as discussed below.143 In addition, the proposed elimination of the third-party access and undertakings requirements may benefit affected entities by reducing cybersecurity and trade-secret risks attendant to requiring a third party to fulfill these responsibilities. Similarly, the proposed elimination of the escrow account option may reduce cybersecurity risk attendant to having this information held by a third party in escrow.144 Certain of the proposed amendments may also incrementally improve regulatory oversight. For example, proposed amendments related to the ability to download and transfer records in human readable and reasonably usable electronic formats may facilitate more efficient Commission oversight as they would reduce the time costs of staff review of individual records as well as searching and sorting electronic records. Further, the proposed amendments requiring that a senior officer provide required undertakings may provide the Commission with a means to obtain records if an affected entity refuses to produce them in the normal course, which may enhance the efficiency of Commission examinations and oversight. C. Costs of the Proposed Amendments The proposed amendments are intended to modernize the Commission’s recordkeeping requirements and to reduce recordkeeping duplication by affected entities. However, as referenced above, the Commission recognizes that some broker-dealers and nonbank SBS Entities may bear costs from having to alter electronic recordkeeping systems currently used. Nonbank SBS Entities may, for example, need to alter electronic storage systems to comply with either the audit-trail or WORM requirement. In addition, broker-dealers may need to build new or alter existing 143 See section V.D. of this release (discussing increases and decreases in costs and burdens relating to proposals for purposes of the Paperwork Reduction Act). 144 The Commission does not expect significant benefits or costs associated with certain other amendments contemplated in the proposal that the Commission believes are technical in nature. These amendments include simplification of the introductory text of paragraph (f)(3) of Rule 17a–4 and paragraph (e)(3) of Rule 18a–6; amendments to paragraphs (f)(3)(i) of Rule 17a–4 and (e)(3)(i) of Rule 18a–6 to replace terms tied to micrographic media and optical disk technology; amendments to better clarify paragraph (f)(3)(ii) of Rule 17a–4 and paragraph (e)(3)(ii) of Rule 18a–6; and amendments moving the requirements for broker-dealers using micrographic media to new paragraph (f)(4) of Rule 17a–4. PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 68317 electronic recordkeeping systems to the extent they would like to meet the audit-trail requirement. As noted below,145 based upon information provided to the Commission by the securities industry, the Commission estimates that the initial cost to build and implement a WORM-compliant electronic recordkeeping system for a large broker-dealer is $10 million, with an additional cost of $1.2 million annually to maintain the system,146 and the Commission believes that the SBS Entities that would be affected by the proposed rule amendments are of large sizes comparable to the universe of broker-dealers that the rulemaking petitioners used to derive those estimates. In addition, based on feedback from the securities industry, the Commission believes that the initial cost to build and implement an electronic recordkeeping system that meets the audit-trail requirements and the ongoing cost to maintain the system would be substantially lower than the analogous costs that would be incurred with respect to a WORM-compliant system.147 In particular, the Commission estimates that the initial cost to build and implement an electronic recordkeeping system that meets the audit-trail requirement for a large broker-dealer or SBS Entity without a prudential regulator and that is not a broker-dealer is $1,000,000, with an additional cost of $120,000 annually to maintain the system. There are 802 broker-dealers with assets greater than $10 million and four SBSDs that would be subject to paragraph (e)(2) of Rule 18a–6. The Commission anticipates that eliminating the application of paragraph (e)(2) of Rule 18a–6 to the 21 SBSDs that have a prudential regulator and are subject to Rule 18a–6 would result in a decrease of 100 hours per firm on an annual basis, or 2,100 hours per year for all firms affected by the proposed amendment, for an ongoing cost savings of $663,000 per year for all affected firms.148 The Commission does not believe any broker-dealers or SBSDs will elect to build a WORM-compliant electronic recordkeeping system. Moreover, the Commission estimates that most of these firms have electronic recordkeeping 145 See section V.D. of this release (discussing decreases and increases in costs and burdens relating to proposals for purposes of the Paperwork Reduction Act). 146 See 17a–4(f) Rulemaking Petition Addendum at 4–5. 147 See e.g. Rule 17a–4(f) Rulemaking Petition at 6–7. 148 2,100 hours × $316 per hour (at the compliance manager rate) = $663,000. E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 68318 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules systems that could meet the audit-trail requirement or that could be configured to meet that requirement without the need to build a new system. The Commission estimates that 20 of these firms would elect to build a new electronic recordkeeping system to meet the audit-trail requirement for an initial one-time industry cost burden of $20,000,000 and an annual cost burden of $2,400,000. The Commission estimates that the cost for the 2,749 broker-dealers with $10,000,000 or less in total assets to build and maintain an electronic recordkeeping system that meets the proposed audit-trail requirement would be significantly less than the $1,000,000 initial and $120,000 annual costs estimated for the 802 larger brokerdealers and four SBSDs that would be subject to paragraph (e)(2) of Rule 18a– 6. Consequently, the Commission estimates that the initial cost to build and implement an electronic recordkeeping system that meets the audit-trail requirement for these smaller broker-dealers is $100,000, with an additional cost of $12,000 annually to maintain the system. The Commission estimates that most of the 2,749 brokerdealers with $10,000,000 or less in total assets will continue to preserve records in the manner they do today: Using a WORM-compliant system, using micrographic media, or maintaining paper records. The Commission estimates that 80 of these firms would elect to build a new electronic recordkeeping system to meet the audittrail requirement for an initial one-time industry cost burden of $8,000,000 and an annual cost burden of $960,000. The Commission believes that brokerdealers and SBS Entities would incur an initial burden and ongoing annual burden in establishing a backup electronic recordkeeping system. The Commission believes these burdens and costs would be substantially less than the burdens and costs of the primary electronic recordkeeping systems because of the benefit of economies of scale for the backup system whereby common technology and personnel could be used for both systems. The Commission estimates that the costs and burdens for the 802 larger broker-dealers and four SBSDs that would be subject to paragraph (e)(2) of Rule 18a–6 would be $250,000 in initial burdens and costs and $30,000 in annual burdens and costs. Further, the Commission expects that the broker-dealers and SBS Entities that have electronic recordkeeping systems that could meet the audit-trail requirement or that could be configured to meet that requirement without the need to build a new system also VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 maintain backup recordkeeping systems for business continuity purposes. Therefore, the initial and annual costs would be incurred by the 20 firms that elect to build a new electronic recordkeeping system that meets the proposed audit-trail requirements. Consequently, the Commission estimates that the industry-wide costs and burdens for these firms would be $5,000,000 in initial costs and burdens and $600,000 in annual costs and burdens. The Commission estimates that the costs and burdens incurred by the 80 smaller broker-dealers that would build electronic recordkeeping systems to meet the audit-trail requirement and, therefore, need to build a backup recordkeeping system, would be substantially less than the costs and burdens incurred by the larger brokerdealers. The Commission estimates that these firms would incur an initial costs and burdens of $25,000 and ongoing annual costs and burdens of $3,000. Therefore, the Commission estimates that the industry-wide costs and burdens for these firms would be $2,000,000 in initial costs and burdens and $240,000 in ongoing annual costs and burdens. The Commission recognizes that the proposal would not harmonize with the parallel recordkeeping rule for CFTC registrants (e.g., futures commission merchants and swap dealers). In contrast, the proposal would impose a bright line audit-trail or WORM requirement. To the degree that such requirements may not satisfy CFTC requirements, a lack of harmonization in the recordkeeping requirement for registrants may give rise to compliance inefficiencies for broker dealers and SBS Entities that are dually registered with the CFTC. Certain other aspects of the proposed amendments may also impose costs on affected entities. Specifically, the proposed amendments related to human readable and reasonably usable electronic file formats may impose compliance costs related to the required updates to recordkeeping systems.149 Proposed amendments to third-party access and undertakings requirements may also impose additional time demands on senior officers, though these costs may be at least partially offset for broker-dealers by savings attendant to removing the requirement for third-party access. To the extent that these proposed requirements increase 149 See section V.D. of this release (discussing increases and decreases in costs and burdens relating to proposals for purposes of the Paperwork Reduction Act). PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 the scope of senior officer duties and increase potential liability on the part of senior officers, senior officers may demand higher compensation and liability insurance, which may result in an increase to senior officer recruitment and retention costs. Further, amendments requiring broker-dealers and SBS Entities to have a backup set of records when records are preserved on an electronic recordkeeping system may impose additional costs related to making updates to compliance systems, as compared to the current rules’ requirements to store separately from originals a duplicate copy of a record.150 D. Reasonable Alternatives The Commission has considered a number of alternatives. For example, the Commission has considered harmonizing the recordkeeping rules for SBS Entities with the CFTC’s principlesbased approach applicable to Swap Entities, but retaining the proposed audit-trail requirement for brokerdealers. As another alternative, the Commission considered harmonizing recordkeeping rules for both brokerdealers and SBS Entities with the CFTC’s principles-based approach. These alternatives could enhance the cost savings from the proposal as affected entities may not need to modify their business recordkeeping systems to meet the proposed electronic recordkeeping system requirements, particularly with respect to nonbank SBS Entities that would need to use electronic recordkeeping systems that meet the WORM or audit-trail requirement. In addition, these alternatives could facilitate transactions across integrated swap and securitybased swap markets. The Commission believes that its proposed rule amendments establishing electronic recordkeeping requirements for SBS Entities should provide greater protection to the original records created and preserved by SBS Entities, thereby giving regulators more reliable and secure access to those records. Unlike the CFTC’s 2017 amendment, the Commission’s proposal retains the WORM standard as a compliance option; the standard requires electronic 150 The Commission does not expect significant costs associated with certain other amendments contemplated in the proposal, including amendments to eliminate the notification and representation requirements from Rule 17a–4(f); amendments to eliminate the escrow account option from paragraph (f)(3)(vi) of Rule 17a–4 and paragraph (e)(3)(vi) of Rule 18a–6; and amendments to the requirements of paragraph (f)(2)(ii)(B) of Rule 17a–4 and paragraph (e)(2)(i) of Rule 18a–6 to provide additional specificity regarding the requirement that original records are completely and accurately captured. E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules records to be maintained exclusively in a non-rewriteable, non-erasable format. The audit-trail alternative would require that the electronic records be preserved in a manner that permits the recreation of an original record if it is altered, overwritten, or erased. Moreover, the Commission believes that its proposal addresses the same concerns addressed in the CFTC proposal, namely the security and authenticity of and access to records.151 Finally, the Commission preliminarily believes that the costs related to modification of existing business recordkeeping systems to meet the proposed electronic recordkeeping system requirements are likely to be low relative to the baseline ongoing costs of maintaining duplicative recordkeeping systems. Thus, the relative magnitude of this benefit of the alternative may be limited. As another alternative, the Commission could require prudentially regulated SBS Entities to meet the proposed electronic recordkeeping system requirements. This alternative would expand the scope of application of the requirements, magnifying its benefits for Commission oversight as well as costs of altering existing recordkeeping systems. As a baseline matter, the Commission recognizes that prudentially regulated SBS Entities are subject to a robust system of recordkeeping requirements for different types of activities, including recordkeeping requirements under the Bank Secrecy Act regarding funds transfers equal to or greater than $3,000; 152 recordkeeping requirements regarding fiduciary accounts; 153 recordkeeping requirements for securities transactions; 154 and recordkeeping requirements for small business and farm loans, including a requirement to maintain the information in machine readable form.155 Importantly, as discussed above, the Commission preliminarily believes that the proposed rule’s requirements may conflict or overlap with the recordkeeping systems banks have implemented under regulations or guidance of the prudential regulators. The Commission preliminarily believes that requiring prudentially regulated SBS Entities to meet the proposed electronic recordkeeping system requirements (in addition to the recordkeeping requirements these 151 Compare Rule 17a–5(f)(3), as proposed to be amended and Rule 18a–6(e)(3), as proposed to be amended, with CFTC Section 1.31(d)(2). 152 See, e.g., 31 CFR 1020.410. 153 See 12 CFR 9.8. 154 See 12 CFR 12.3. 155 See 12 CFR 25.42. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 entities are already subject to) would not create significant incremental benefits. As another alternative, the Commission could have proposed eliminating the WORM alternative and requiring all broker-dealers and nonbank SBS Entities to comply with an audit-trail requirement. This alternative would require all affected entities to modernize their recordkeeping systems to meet the audit-trail requirement. While this alternative could produce long-term compliance efficiencies for a greater number of affected participants, it would also require all affected entities with WORM compliant systems to upgrade their electronic recordkeeping systems. Since compliance costs may be particularly burdensome for smaller entities, the alternative could have a disproportionate effect on smaller and medium-sized broker-dealers. Finally, the Commission could have proposed requiring that a second senior officer has independent access to and the ability to provide the records and to execute the undertakings at all times. To the degree that relying on a single senior officer may present risks that the senior officer is unable or unwilling to obtain records, this alternative could increase the probability that the Commission would be able to access records. Thus, relative to the proposal, the alternative may further enhance the efficiency of Commission examinations and oversight. However, this alternative may impose additional time demands on a second senior officer in each affected entity. To the extent that the alternative would increase the scope of duties and increase potential liability on the part of a greater number of senior officers of affected entities, more senior officers may demand higher compensation and liability insurance, which may result in a greater increase to senior officer recruitment and retention costs relative to the proposal. Requiring a second individual to have the authority to grant access to the records may potentially increase cybersecurity risks compared to the proposed approach, although it would likely still represent less risk than the baseline third-party approach. E. Effects on Efficiency, Competition, and Capital Formation The primary effect of the proposed amendments on efficiency would stem from increased efficiency of brokerdealer and SBS Entity recordkeeping. Permitting either the audit-trail or WORM (introduced in the optical disk era) alternative is intended to allow broker-dealers and SBS Entities to modernize the records and systems such entities maintain for regulatory PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 68319 purposes. The Commission anticipates that most of the affected entities would respond to such a requirement by eliminating duplicative recordkeeping for regulatory and business purposes, giving rise to cost efficiencies discussed above. The proposal would not alter the amount, type, or manner of disclosures available to investors or the Commission, nor would it change broker-dealer or SBS Entity business models or activities. Thus, the Commission does not anticipate the proposal to impact informational or allocative efficiency. The proposed amendments are not expected to significantly impact competition between bank and nonbank SBS Entities. As described above, the proposal would impose electronic recordkeeping system requirements (including the audit-trail alternative) on nonbank SBS Entities, but not on bank SBS Entities. Transitioning regulatory recordkeeping systems from hardware solutions (such as optical disks) meeting the WORM requirement to electronic records compliant with the audit-trail requirement may require costly modifications to existing recordkeeping systems of broker-dealers and nonbank SBS Entities may need to modify existing electronic recordkeeping systems to meet either the WORM or audit-trail requirement; bank SBS Entities would not bear such costs. To the extent that the proposal results in cost savings for broker-dealers and SBS Entities estimated above, affected entities may be able to allocate newly available capital into capital forming activities. However, it is not clear that affected entities would direct cost savings to expanding their financial intermediation business and given the magnitude of the cost savings estimated above, the capital formation effects of the proposal are likely limited. Therefore, the proposal is also not expected to have significant effects on capital formation. F. Request for Comment The Commission requests comment on all aspects of the economic analysis of the proposed amendments. To the extent possible, the Commission requests that commenters provide supporting data and analysis with respect to the benefits, costs, and effects on competition, efficiency, and capital formation of adopting the proposed amendments or any reasonable alternatives. In particular, the Commission asks commenters to consider the following questions: 1. What additional qualitative or quantitative information should the Commission consider as part of the E:\FR\FM\01DEP2.SGM 01DEP2 68320 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 baseline for its economic analysis of these amendments? How many brokerdealers are maintaining separate recordkeeping systems for business and regulatory purposes? How many brokerdealers and SBS Entities affected by the proposed amendments have electronic recordkeeping systems that would meet the proposed audit-trail requirement? 2. Has the Commission accurately characterized the costs and benefits of proposed amendments? If not, why not? Should any of the costs or benefits be modified? What, if any, other costs or benefits should the Commission take into account? If possible, please offer ways of estimating these costs and benefits. What additional considerations can the Commission use to estimate the costs and benefits of the proposed amendments? 3. Has the Commission accurately characterized the effects on competition, efficiency, and capital formation arising from the proposed amendments? If not, why not? 4. Has the Commission accurately characterized the economic effects of the above alternatives? For example, has the Commission accurately characterized the economic effects of the alternative requiring prudentially regulated SBS Entities to meet the proposed electronic recordkeeping system requirements? If not, why not? Should any of the costs or benefits be modified? What, if any, other costs or benefits should the Commission take into account? 5. Are there other reasonable alternatives to the proposed amendments? What are the economic effects of any other alternatives? 6. Are there data sources or data sets that can help the Commission refine its estimates of the costs and benefits associated with the proposed amendments? If so, please identify them. V. Paperwork Reduction Act Certain provisions of the rule amendments proposed in this release would contain a new ‘‘collection of information’’ within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).156 The Commission is submitting the proposed rule amendments and proposed new rules to the Office of Management and Budget (‘‘OMB’’) for review and approval in accordance with the PRA and its implementing regulations.157 An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it 156 See 157 See 44 U.S.C. 3501 et seq. 44 U.S.C. 3507; 5 CFR 1320.11. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 displays a currently valid OMB control number.158 The titles for the collections of information are: (1) Rule 17a–4—Records to be preserved by certain brokers and dealers (OMB control number 3235–0279); and (2) Rule 18a–6—Records to be preserved by certain security-based swap dealers and major security-based swap participants (OMB control number 3235–0751). The burden estimates contained in this section do not include any other possible costs or economic effects beyond the burdens required to be calculated for PRA purposes. A. Summary of Collections of Information 1. Proposed Amendments to Rules 17a– 4(f) and 18a–6(e) Rule 17a–4 sets forth record preservation requirements applicable to broker-dealers, including broker-dealers also registered as SBSDs or MSBSPs.159 Rule 18a–6 sets forth record preservation requirements applicable to SBS Entities that are not dually registered as broker-dealers.160 The Commission is proposing to amend Rules 17a–4(f) 161 and 18a–6(e),162 which prescribe requirements for broker-dealers and SBS Entities, respectively, that elect to preserve records electronically to comply with the record preservation requirements of Rules 17a–4 and 18a–6, respectively. The proposed amendments to Rule 17a–4(f) would add the audit-trail alternative to the current WORM requirement.163 The amendments to Rule 18a–6(e) would add a requirement that electronic recordkeeping systems used by nonbank SBS Entities to comply with the record preservation requirements of Rule 18a–6 must meet either the audit-trail or WORM requirement.164 Rule 17a–4(f) currently requires a broker-dealer to store separately from 158 See 5 CFR 1320.11(l). 17 CFR 240.17a–4. As stated above, the term ‘‘broker-dealer’’ for the purposes of this release includes broker-dealers that are also registered as SBSDs or MSBSPs. 160 See 17 CFR 240.18a–6. As stated above, the term ‘‘SBS Entity’’ for the purposes of this release refers to SBSDs and MSBSPs that are not also registered as broker-dealers. 161 See Rule 17a–4(f) (setting forth the electronic record preservation requirements for brokerdealers). 162 See Rule 18a–6(e) (setting forth the electronic record preservation requirements for SBS Entities). 163 See section II.D. of this release (discussing these proposed amendments). 164 As defined above, the term ‘‘nonbank SBS Entity’’ refers to an SBS Entity that does not have a prudential regulator and the term ‘‘bank SBS Entity’’ refers to an SBS Entity that has a prudential regulator. 159 See PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 the original, on any medium acceptable under Rule 17a–4, a duplicate copy of a record for the requisite time period. Similarly, Rule 18a–6(e) currently requires that an SBS Entity store separately from the original a duplicate copy of a record stored on the electronic storage system for the requisite time period. These current provisions require broker-dealers and SBS Entities to maintain a second copy of a record. The Commission is proposing amendments to both of these paragraphs to require the broker-dealer and the SBS Entity to have a backup set of records when records are preserved on an electronic recordkeeping system.165 Under the proposal, the broker-dealer or SBS Entity would need to have a second electronic recordkeeping system. Rule 17a–4(f) currently requires that, for every broker-dealer exclusively using electronic storage media for some or all of its record preservation, at least one third party, who has access to and the ability to download information from the broker-dealer’s electronic storage media to any acceptable medium under Rule 17a–4, must file with the DEA for the broker-dealer certain undertakings that the third party will provide access to the broker-dealer’s electronic records and provide them to the Commission and other securities regulators if requested. The proposed amendments to Rule 17a–4(f) would eliminate the third-party access and undertakings requirements and replace them with a requirement that a senior officer of the broker-dealer have the access and provide the necessary undertakings.166 Rule 18a–6(e) currently does not have third-party access and undertakings requirements; the proposed amendments to the rule would add senior officer access and undertakings requirements analogous to that of Rule 17a–4(f), as proposed to be amended.167 The Commission is proposing to no longer impose the requirements for electronic recordkeeping systems in paragraph (e)(2) of Rule 18a–6, as proposed to be amended, on bank SBS Entities.168 However, the other provisions of paragraph (e) of Rule 18a– 6, as proposed to be amended, would continue to apply to all SBS Entities. The Commission is proposing to move the requirements for broker-dealers using micrographic media to new 165 See section II.E. of this release (discussing these proposed amendments). 166 Id. 167 Id. 168 See section II.D. of this release (discussing these proposed amendments). E:\FR\FM\01DEP2.SGM 01DEP2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules paragraph (f)(4) of Rule 17a–4.169 Rule 18a–6(e) does not provide for retaining records using micrographic media. The proposed amendments to Rule 17a–4(f) would eliminate a requirement that the broker-dealer notify its DEA before employing an electronic recordkeeping system.170 Rule 18a–6(e) currently does not have a similar DEA notification requirement. 2. Proposed Amendments to Rules 17a– 4(j) and 18a–6(g) Rule 17a–4(j) requires broker-dealers to furnish promptly to the Commission legible, true, complete, and current copies of those records of the firm that are required to be preserved under Rule 17a–4 or any other record of the firm that is subject to examination under Section 17(b) of the Exchange Act.171 Rule 18a–6(g) requires SBS Entities to furnish promptly to a representative of the Commission legible, true, complete, and current copies of those records of the firm that are required to be preserved under Rule 18a–6, or any other records of the firm subject to examination or required to be made or maintained pursuant to Section 15F of the Exchange Act.172 The Commission is proposing to amend the prompt production of records requirements of Rules 17a–4(j) and 18a–6(g).173 The proposed amendments to Rules 17a–4(j) and 18a– 6(g) would require a broker-dealer or SBS Entity, respectively, to furnish a record and its audit trail (if applicable) preserved on an electronic recordkeeping system pursuant to Rules 17a–4(f) and 18a–6(e), respectively, in a reasonably usable electronic format, if requested by a representative of the Commission.174 lotter on DSK11XQN23PROD with PROPOSALS2 B. Proposed Use of Information The requirements of Rules 17a–4 and 18a–6, and the proposed amendments to these rules, are designed, among other things, to promote the prudent operation of broker-dealers and SBS Entities and to assist the Commission, SROs, and state securities regulators in conducting effective examinations.175 169 See section II.F. of this release (discussing these proposed amendments). 170 See section II.C. of this release (discussing these proposed amendments). 171 See Rule 17a–4(j) (setting forth the prompt production of records requirements for brokerdealers); 15 U.S.C. 78q(b). 172 See Rule 18a–6(g) (setting forth the prompt production of records requirements for SBS Entities); 15 U.S.C. 78o–10(f). 173 See section II.G. of this release (discussing these proposed amendments). 174 See Rule 17a–4(j) and Rule 18a–6(g), as proposed to be amended. 175 See, e.g., Books and Records Requirements for Brokers and Dealers Under the Securities Exchange VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 The proposed amendments to Rules 17a–4(j) and 18a–(g) are designed to facilitate examinations and other regulatory reviews by making them more efficient. Taken as a whole, the collections of information under the proposed amendments to Rules 17a– 4(f), 18a–6(e), 17a–4(j), and 18a–6(g) would promote the prudent operation of broker-dealers and SBS Entities and facilitate the examinations of brokerdealers and SBS Entities by the Commission, SROs, and state securities regulators. C. Respondents As of December 31, 2020, there were 3,551 broker-dealers registered with the Commission.176 As of November 9, 2021, 41 SBSDs have registered with the Commission, while no MSBSPs have registered with the Commission.177 Six of the SBSDs are existing broker-dealers or will be broker-dealers and, therefore, are included in the 3,551 broker-dealers. Nine of the SBSDs are applying substituted compliance with respect to the requirements of Rule 18a–6(e).178 One SBSD is using the alternative compliance mechanism of Exchange Act Rule 18a–10 and, therefore, is complying with the CFTC’s recordkeeping rules.179 This leaves 25 SBSDs that are subject to Rule 18a–6(e) and, therefore, would be subject to the proposed amendments to that rule. Twenty-one of these SBSDs have a prudential regulator. This leaves four SBSDs that would be subject to paragraph (e)(2) of Rule 18a–6. Finally, 24 of the 25 SBSDs subject to Rule 18a– 6(e) are also registered with the CFTC as swap dealers. The following table summarizes the estimated number of respondents that would be subject to the amendments to Rule 17a–4(f) and the number of SBSDs that would be subject to the amendments to Rule 18a–6(e) and paragraph (e)(2) of Rule 18a–6. Act of 1934, Exchange Act Release No. 44992 (Oct. 26, 2001), 66 FR 55818 (Nov. 2, 2001) (‘‘The Commission has required that broker-dealers create and maintain certain records so that, among other things, the Commission, [SROs], and State Securities Regulators . . . may conduct effective examinations of broker-dealers’’ (footnote omitted)). 176 This estimate is derived from broker-dealer FOCUS filings as of December 31, 2020, as described in greater detail in the economic baseline, and is inclusive of five OTC derivatives dealers affected by the proposed amendments. 177 See List of Registered Security-Based Swap Dealers and Major Security-Based Swap Participants, available at: https://www.sec.gov/tm/ List-of-SBS-Dealers-and-Major-SBS-Participants. 178 See Substituted Compliance Notices, available at: https://www.sec.gov/tm/Substituted-complianceNotices. 179 See 17 CFR 240.18a–10. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 Type of registrant Broker-dealers (including SBSDs dually registered as broker-dealers) ............. SBSDs that would be subject to Rule 18a–6(e) as proposed to be amended ....... SBSDs that would be subject to Rule 18a–6(e)(2) as proposed to be amended .. 68321 Number 3,551 25 4 Based upon the recent experience of the staff, the Commission estimates that approximately 95% of the brokerdealers, including broker-dealers that will be dually registered as SBS Entities, (i.e., 3,373 broker-dealers) use electronic recordkeeping systems; all of these firms are expected to continue to use electronic recordkeeping systems pursuant to the requirements of Rule 17a–4(f), as proposed to be amended. The Commission believes that all SBSDs that are subject to Rule 18a–6(e) (25 SBSDs) use electronic recordkeeping systems pursuant to the requirements of Rule 18a–6(e) and would continue to do so under the proposed amendments. D. Total Initial and Annual Reporting Burdens 1. Proposed Amendments to Rules 17a– 4(f) and 18a–6(e) Rules 17a–4(f) and 18a–6(e) currently impose collection of information requirements that result in initial and annual time burdens for broker-dealers and SBSDs. The proposed amendments to these rules would both add to and decrease the current time burden estimates as explained below. The proposed amendments to Rule 17a–4(f) would provide an audit-trail alternative to the current WORM requirement for electronic recordkeeping systems used by brokerdealers to meet the record preservation requirements of Rule 17a–4.180 Consequently, broker-dealers could continue to meet the requirements of the rule by using a WORM-compliant electronic recordkeeping system they employ today. The amendments to Rule 18a–6(e) would add a requirement that electronic recordkeeping systems used by nonbank SBSDs to comply with the record preservation requirements of Rule 18a–6 must meet either the audittrail or WORM requirement.181 The Commission believes that few, if any, broker-dealers or nonbank SBSDs that use electronic recordkeeping systems are not currently compliant with the rules, as proposed to be amended, either because they currently 180 See section II.D. of this release (discussing these proposed amendments). 181 Id. E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 68322 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules use an electronic recordkeeping system that meets the WORM requirement or that could meet the proposed audit-trail requirement. Indeed, the Commission believes that some broker-dealers and nonbank SBSDs are using a modern, audit-trail compliant electronic recordkeeping system for their own business purposes while simultaneously maintaining a WORM-compliant system solely for the purpose of complying with the requirements of Rule 17a–4(f). A broker-dealer that does not preserve records electronically would incur initial costs to build an electronic recordkeeping system that meets either the WORM requirement or the audittrail requirement or would have the initial burden of hiring a vendor to provide the service. A broker-dealer that preserves records electronically using a WORM-compliant electronic recordkeeping system would have an initial burden to build an electronic recordkeeping system that meets the audit-trail requirement, if it elects to use that alternative. An SBSD would have an initial burden build an electronic recordkeeping system that meets either the WORM requirement or the audittrail requirement or would have the initial burden of hiring a vendor to provide the service. Similarly, on an ongoing basis, the broker-dealer or SBSD would be required to expend financial or human resources to maintain their recordkeeping systems to comply with the proposed audit-trail or WORM requirements. Based upon information provided to the Commission by the securities industry, the Commission estimates that the initial cost to build and implement a WORM-compliant electronic recordkeeping system for a large brokerdealer is $10 million, with an additional cost of $1.2 million annually to maintain the system.182 Based on feedback from the securities industry, the Commission believes that the initial cost to build and implement an electronic recordkeeping system that meets the audit-trail requirements and the ongoing cost to maintain the system would be substantially lower than the analogous costs that would be incurred with respect to a WORM-compliant system.183 Consequently, the Commission estimates that the initial cost to build and implement an electronic recordkeeping system that meets the audit-trail requirement for a large broker-dealer is $1,000,000, with an additional cost of $120,000 annually 182 See Rule 17a–4(f) Rulemaking Petition Addendum at 4–5. 183 See e.g. Rule 17a–4(f) Rulemaking Petition at 6–7. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 to maintain the system. There are 802 broker-dealers with assets greater than $10 million and there are four SBSDs that would be subject to paragraph (e)(2) of Rule 18a–6. The Commission does not believe any of these firms will elect to build a WORM-compliant electronic recordkeeping system. Moreover, the Commission estimates that most of these firms have electronic recordkeeping systems that could meet the audit-trail requirement or that could be configured to meet that requirement without the need to build a new system. The Commission estimates that 20 of these firms would elect to build a new electronic recordkeeping system to meet the audit-trail requirement for an initial one-time industry cost burden of $20,000,000 and an annual cost burden of $2,400,000. The Commission estimates that the cost for the 2,749 broker-dealers with $10,000,000 or less in total assets to build and maintain an electronic recordkeeping system that meets the proposed audit-trail requirement would be significantly less than the $1,000,000 initial and $120,000 annual costs estimated for the 802 larger brokerdealers and the four SBSDs that would be subject to paragraph (e)(2) of Rule 18a–6. Consequently, the Commission estimates that the initial cost to build and implement an electronic recordkeeping system that meets the audit-trail requirement for these smaller broker-dealers is $100,000, with an additional cost of $12,000 annually to maintain the system. The Commission estimates that most of the 2,749 brokerdealers with $10,000,000 or less in total assets will continue to preserve records in the manner they do today: Using a WORM-compliant system, using micrographic media, or maintaining paper records. The Commission estimates that 80 of these firms would elect to build a new electronic recordkeeping system to meet the audittrail requirement for an initial one-time industry cost burden of $8,000,000 and an annual cost burden of $960,000. The Commission believes that brokerdealers and SBSDs would incur an initial burden and ongoing annual burden in establishing a backup electronic recordkeeping system. The Commission believes these burdens and costs would be substantially less than the burdens and costs of the primary electronic recordkeeping systems because of the benefit of economies of scale for the backup system whereby common technology and personnel could be used for both systems. The Commission estimates that the costs and burdens for the 802 larger broker-dealers and the four SBSDs that would be PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 subject to paragraph (e)(2) of Rule 18a– 6 would be $250,000 in initial burdens and costs and $30,000 in annual burdens and costs. Further, the Commission expects that the brokerdealers and SBSDs that have electronic recordkeeping systems that could meet the audit-trail requirement or that could be configured to meet that requirement without the need to build a new system also maintain backup recordkeeping systems for business continuity purposes. Therefore, the initial and annual costs would be incurred by the 20 firms that elect to build a new electronic recordkeeping system that meets that proposed audit-trail requirement. Consequently, the Commission estimates that the industrywide costs and burdens for these firms would be $5,000,000 in initial costs and burdens and $600,000 in annual costs and burdens. The Commission estimates that the costs and burdens incurred by the 80 smaller broker-dealers that would build electronic recordkeeping systems to meet the audit-trail requirement and, therefore, need to build a backup recordkeeping system, would be substantially less than the costs and burdens incurred by the larger brokerdealers. The Commission estimates that these firms would incur an initial costs and burdens of $25,000 and ongoing annual costs and burdens of $3,000. Therefore, the Commission estimates that the industry-wide costs and burdens for these firms would be $2,000,000 in initial costs and burdens and $240,000 in ongoing annual costs and burdens. The proposed amendments to Rule 17a–4(f) would eliminate the third-party access and undertakings requirements and replace them with a requirement that a senior officer of the broker-dealer have the access and provide the necessary undertakings. Based on the Commission’s most recent information submitted to the OMB in connection with the renewal of Rule 17a–4, this would result in an estimated elimination of an annual cost of less than $5,000 that the broker-dealer must incur in paying a third party to agree to perform this service. Rule 18a–6(e) does not contain a third-party undertakings requirement; however, the proposed amendments to the rule would add senior officer access and undertakings requirements analogous to that of Rule 17a–4(f), as proposed to be amended.184 184 As noted above, paragraph (f) of Rule 18a–6 currently includes a requirement that if the records required to be maintained and preserved by the SBS Entity (whether electronic or otherwise) are prepared or maintained by a third party on behalf of the SBS Entity, the third party must file E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules The Commission believes that the change, in the case of broker-dealers, from a third party to a senior officer requirement and, in the case of SBSDs, the addition of a senior officer requirement, would result in a one-time initial burden of one hour per firm, for a total of 3,373 hours for an initial cost of $1,676,381 under Rule 17a–4(f) and 25 hours for an initial cost of $12,425 for SBSDs under Rule 18a–6(e).185 The Commission also believes that the senior officer requirement would add an annual burden of one hour per firm, for a total of 3,373 hours for broker-dealers collectively 186 for a total ongoing cost of $1,676,381, and 25 hours for a total ongoing cost of $12,425 for SBSDs collectively.187 The proposed amendments would move existing requirements for brokerdealers using micrographic media from paragraph (f)(3)(i) of Rule 17a–4 to proposed new paragraph (f)(4) of Rule 17a–4, but do not change the substantive requirements. The proposed amendments do not propose a micrographic media alternative for SBS Entities for the reasons described above. The Commission does not believe the proposed amendments relating to micrographic media would have any impact on the burden experienced by broker-dealers. The Commission anticipates that eliminating the application of paragraph (e)(2) of Rule 18a–6 to the 21 SBSDs that have a prudential regulator and are subject to Rule 18a–6 would result in a decrease of 100 hours per firm on an annual basis, or 2,100 hours per year for all firms affected by the proposed amendment, for an ongoing cost savings of $663,000 per year for all affected firms.188 Finally, based upon information provided to the Commission from FINRA staff, the Commission believes that the elimination of the DEA notification requirement would decrease the industry-wide burden of compliance by one hour per broker-dealer submitting the notice to its DEA, or approximately 433 hours per year, for an ongoing cost savings of $136,828 189 per year for the industry. undertakings with the Commission. See paragraph (f) of Rule 18a–6. 185 Throughout this section, to monetize the internal costs the Commission staff used data from the SIFMA publications, Management and Professional Earnings in the Securities Industry— 2013, and Office Salaries in the Securities Industry—2013, modified by the Commission staff to account for an 1800 hour work-year and multiplied by 5.35 (professionals) or 2.93 (office) to account for bonuses, firm size, employee benefits and overhead. These figures have been adjusted for inflation through the end of 2020 using data published by the Bureau of Labor Statistics. One-time initial cost for broker-dealers: 3,373 hours × $497 per hour (at the controller hourly rate) = $1,676,381. One time initial cost for SBSDs: 25 hours × $497 per hour (at the controller hourly rate) = $12,425. 186 The Commission believes that while the existing third-party requirement is an external burden, the proposed senior officer requirement would be an internal burden required to be accounted for in this section. 187 Ongoing cost for broker-dealers: 3,373 hours × $497 per hour (at the controller hourly rate) = $1,676,381. Ongoing cost for SBSDs: 25 hours × $497 per hour (at the controller hourly rate) = $12,425. F. Confidentiality of Responses to Collection of Information VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 2. Proposed Amendments to Rules 17a– 4(j) and 18a–6(g) The proposed amendments to Rules 17a–4(j) and 18a–6(g) would require a broker-dealer or SBS Entity, respectively, to furnish a record and its audit trail (if applicable) preserved on an electronic recordkeeping system pursuant to Rules 17a–4(f) and 18a–6(g), respectively, in a reasonably usable electronic format, if requested by a representative of the Commission. The Commission does not believe that these proposed amendments will change the initial or annual hourly burden for broker-dealers or SBS Entities. The Commission solicits comment on what the estimated initial and annual burden is for broker-dealers and SBS Entities to comply with current versions Rule 17a– 4(j) and Rule 18a–6(g) and for those firms to comply with those rules, as proposed to be amended. E. Collection of Information Is Mandatory The collections of information pursuant to the proposed amendments are mandatory, as applicable, for brokerdealers and SBS Entities. A broker-dealer or SBS Entity requested by the Commission to produce records retained electronically pursuant to the requirements of Rules 17a–4 or 18a–6 can request confidential treatment of the information.190 If such confidential treatment request is made, the Commission anticipates that it will keep the information confidential subject to applicable law.191 188 2,100 hours × $316 per hour (at the compliance manager rate) = $663,000. 189 433 hours × $316 per hour (at the compliance manager rate) = $136,828. 190 See 17 CFR 200.83. Information regarding requests for confidential treatment of information submitted to the Commission is available on the Commission’s website at https://www.sec.gov/foia/ howfo2.htm#privacy. 191 See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing the public availability of information obtained by the Commission). PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 68323 G. Retention Period for Recordkeeping Requirements Rule 17a–4, as proposed to be amended, specifies the required retention periods for records required to be made and preserved by a brokerdealer, whether electronically or otherwise.192 Rule 18a–6, as proposed to be amended, specifies the required retention periods for records required to be made and preserved by an SBS Entity, whether electronically or otherwise.193 Many of the required records must be retained for three years; certain other records must be retained for longer periods.194 H. Request for Comments Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comment on the proposed collections of information in order to: • Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information would have practical utility; • Evaluate the accuracy of the Commission’s estimates of the burden of the proposed collections of information; • Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and • Evaluate whether there are ways to minimize the burden of the collection of information on those who respond, including through the use of automated collection techniques or other forms of information technology. Persons submitting comments on the collection of information requirements should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy of their comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090, with reference to File Number S7–19–21. Requests for materials submitted to OMB by the Commission with regard to this collection of information should be in writing, with reference to File Number S7–19–21 and be submitted to the Securities and Exchange Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC 20549–2736. As OMB is required to make a decision 192 See Rule 17a–4, as proposed to be amended. Rule 18a–6, as proposed to be amended. 194 See Rules 17a–4 and 18a–6, as proposed to be amended. 193 See E:\FR\FM\01DEP2.SGM 01DEP2 68324 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules concerning the collections of information between 30 and 60 days after publication, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. lotter on DSK11XQN23PROD with PROPOSALS2 VI. Initial Regulatory Flexibility Act Analysis A. Reasons for, and Objectives of, the Proposed Action The proposed amendments to Rules 17a–4 and 18a–6 are designed to modernize the electronic recordkeeping requirements for broker-dealers and SBS Entities, and to align the requirements in those rules more closely to the current electronic recordkeeping practices of broker-dealers and SBS Entities. As discussed in greater detail above, the amendments to Rule 17a–4 would provide an audit-trail alternative to the current requirement that brokerdealer electronic records be preserved exclusively in a non-rewriteable, nonerasable format. The audit-trail alternative would require that the electronic records be preserved in a manner that permits the recreation of an original record if it is altered, overwritten, or erased. Rule 18a–6, which applies to SBS Entities, currently does not have a requirement to preserve electronic records: (1) In a manner that permits the recreation of an original record if it is altered, over-written or erased; or (2) exclusively in a nonrewriteable, non-erasable format. The amendments to Rule 18a–6 would require an SBS Entity without a prudential regulator that preserves records electronically to meet one of these two requirements. The Commission believes that the amendments will save many brokerdealers and SBS Entities from the burden of maintaining two sets of parallel records: one for business purposes, preserved in a manner that would fulfill the audit-trail alternative requirements that the Commission is proposing, and another set of records that is preserved in a non-rewritable, non-erasable method in order to comply with the current requirements of 17a– 4(f). The proposed amendments also would eliminate the third-party access and undertakings requirements and replace them with a requirement that a senior officer of the broker-dealer provide the access and undertakings. The Commission preliminarily believes that the existing third-party access and undertakings requirements are outdated in light of the changed technological environment and that providing a third party access to electronic recordkeeping VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 systems and customer information needlessly exposes firms to data leakage and cybersecurity threats. The Commission preliminarily believes replacing the third-party access and undertakings requirements with a requirement that a senior officer provide access and the undertakings would address cybersecurity and trade-secret concerns about requiring a third party to fulfill this responsibility. In addition, the amendments would add a requirement to Rule 17a–4(j) and 18a–6(g) that a broker-dealer or SBS Entity, respectively, furnish a record and its audit trail (if applicable) preserved on an electronic recordkeeping system pursuant Rules 17a–4(f) and 18a–6(g), respectively, in a reasonably usable electronic format, if requested by a representative of the Commission. The Commission believes that the production of records in a reasonably usable electronic format would facilitate examinations and other regulatory reviews by making them more efficient. The amendments to Rule 17a–4 also would eliminate a requirement that the broker-dealer notify its DEA before employing an electronic recordkeeping system. The Commission preliminarily believes this requirement is no longer necessary because the rule was adopted at a time when the use of electronic recordkeeping systems by broker-dealers to meet the record preservation requirements of Rule 17a–4 was a relatively new phenomenon, and the staff of DEAs, including FINRA, now have substantial experience and familiarity with the topic. Finally, the amendments to both rules would remove or replace text to make them more technology neutral and to improve readability. B. Legal Basis Pursuant to Exchange Act Section 17, 15 U.S.C. 78q the Commission is proposing to revise § 240.17a–4(f) and (j) and § 240.18a–6(e) and (g) of title 17 of the Code of Federal Regulations. C. Small Entities Subject to the Proposed Rules As discussed above, the Commission estimates that approximately 3,551 broker-dealers and 25 SBSDs that are not broker-dealers would be subject to the new electronic recordkeeping requirements as a result of the amendments to Rules 17a–4(f) and (j) and to Rules 18a–6(e) and (g), respectively. For purposes of this Regulatory Flexibility Act (‘‘RFA’’) analysis, the Commission refers to broker-dealers that might be deemed PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 small entities under the RFA as ‘‘small entities.’’ Based on FOCUS Report data, the Commission estimates that as of June 30, 2021, approximately 1,439 of those broker-dealers might be deemed small entities for purposes of this analysis. Based upon the Commission’s prior RFA certification that adoption of Rule 18a–6 would not have a significant economic impact on a substantial number of small entities for the purposes of the RFA,195 the Commission believes that no small entities will be affected by the proposed amendments to Rule 18a–6. D. Reporting, Recordkeeping, and Other Compliance Requirements The RFA requires a description of the projected reporting, recordkeeping, and other compliance requirements of the proposed amendments to Rules 17a–4(f) and (j) and Rules 18a–6(e) and (g), including an estimate of the classes of small entities that would be subject to the requirements and the type of professional skill necessary to prepare required reports and records. Following is a discussion of the associated costs and burdens of compliance with the proposed amendments, as incurred by small entities.196 The Commission does not believe that the compliance costs of the proposed amendments would be significant. The Commission believes that the proposed audit-trail alternative to preserving electronic records would be consistent with existing broker-dealer practices. Broker-dealers have explained to the Commission that the electronic recordkeeping systems used for business purposes are dynamic and updated constantly (e.g., with each new transaction or position) and easily accessible for retrieving records. The Commission believes that these contemporary electronic recordkeeping business systems, in many cases, can be configured to meet the audit-trail requirement in Rule 17a–4(f), as proposed to be amended. Moreover, small broker-dealers could continue to preserve records on electronic recordkeeping systems that meet the WORM requirement. The proposed replacement of the required third-party access and undertakings requirements in Rule 17a– 4(f) with a requirement that a senior officer of the broker-dealer have the access and make the required undertakings should reduce the burden 195 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68645. 196 See section V.D.1, above (describing costs for smaller broker-dealers, which could include brokerdealers that are small entities). E:\FR\FM\01DEP2.SGM 01DEP2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules on small broker-dealers because they will be able to use an internal resource at no marginal cost rather than an external source to comply with the requirement. The proposed amendments to Rule 17a–4(j) that would require a brokerdealer to furnish a record and its audit trail (if applicable) preserved on an electronic recordkeeping system pursuant Rule 17a–4(f) in a reasonably usable electronic format, if requested by a representative of the Commission, should not impose a burden on small entities. E. Duplicative, Overlapping, or Conflicting Federal Rules The Commission does not believe that the proposed amendments impacting smaller entities that are broker-dealers would duplicate, overlap, or conflict with other Federal Rules. lotter on DSK11XQN23PROD with PROPOSALS2 F. Significant Alternatives The RFA directs the Commission to consider significant alternatives that would accomplish its stated objective, while minimizing any significant economic impact on small entities. The Commission considered the following alternatives for small entities in relation to our proposal: (1) Exempting brokerdealers that are small entities from the proposed requirements, to account for resources available to small entities; (2) establishing different requirements, including frequency, to account for resources available to small entities; (3) clarifying, consolidating, or simplifying the compliance requirements under the proposal for small entities; and (4) using performance rather than design standards. The Commission considered exempting broker-dealers that are small entities from the proposal and considered establishing different requirements for these firms.197 However, the Commission elected not to do so for a number of reasons, including: (1) The option for small entities to keep their records in paper or micrographic media, rather than electronically; (2) the importance of establishing requirements for reliable and secure electronic recordkeeping systems for broker-dealers; (3) the availability of multiple third-party vendors to provide the electronic recordkeeping services; and (4) the ability of small entities to continue to use existing WORM-compliant electronic recordkeeping systems. 197 As stated above, the Commission does not believe any SBS Entities qualify as ‘‘small entities’’ for the purposes of the RFA. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 In this vein, the Commission considered proposing the elimination of the WORM alternative and requiring all broker-dealers and nonbank SBS Entities to comply with an audit-trail requirement. This alternative would require all affected entities to modernize their recordkeeping systems to meet the audit-trail requirement. While this alternative could produce long-term compliance efficiencies for a greater number of affected participants, it would also require all affected entities with WORM-compliant systems to upgrade their electronic recordkeeping systems. The Commission elected not to propose this alternative given its preliminary belief that the accompanying compliance costs could be particularly burdensome for smaller entities and that the alternative could have a disproportionate effect on smaller and medium-sized brokerdealers.198 1. The Commission also considered simplifying compliance by proposing performance rather than design standards similar to the approach taken by the CFTC. The CFTC amended the electronic recordkeeping requirements by replacing prescriptive requirements for electronic recordkeeping systems with a principles-based approach.199 The Commission believes that its proposed rule amendments, establishing electronic recordkeeping requirements for broker-dealers should provide greater protection to the original records created and preserved by broker-dealers, thereby giving regulators more reliable and secure access to those records. Unlike the CFTC’s rules, the Commission’s proposal retains the WORM standard, which requires electronic records to be maintained exclusively in a non-rewriteable, nonerasable format. The audit-trail alternative would require that the electronic records be preserved in a manner that permits the recreation of an original record if it is altered, overwritten, or erased. Moreover, the Commission believes that its proposal addresses the same concerns addressed in the CFTC proposal, namely the security and authenticity of and access to records.200 For these reasons, the Commission determined not to propose principles-based rules. 198 See section IV.D. of this release (analyzing the potential costs of alternatives to the rule amendments the Commission is proposing). 199 See CFTC Electronic Recordkeeping Release, 82 FR at 24480. 200 Compare Rule 17a–4(f), as proposed to be amended, and Rule 18a–6(e), as proposed to be amended, with CFTC Section 1.31(d)(2). PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 68325 G. Request for Comment The Commission encourages the submission of comments with respect to any aspect of this initial RFA analysis. In particular, the Commission requests comment regarding: 1. Whether there are more efficient or less burdensome ways for the Commission to modernize the electronic recordkeeping requirements for registrants compared to what the Commission has proposed; 2. The number of small entities that may be affected by the proposed rule amendments; and 3. Whether there are any Federal rules that duplicate, overlap, or conflict with the proposed amendments. VII. Small Business Regulatory Enforcement Fairness Act For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 (‘‘SBREFA,’’) 201 the Commission must advise the OMB as to whether the proposed regulation constitutes a ‘‘major’’ rule. Under SBREFA, a rule is considered ‘‘major’’ where, if adopted, it results or is likely to result in: • An annual effect on the economy of $100 million or more (either in the form of an increase or a decrease); • A major increase in costs or prices for consumers or individual industries; or • Significant adverse effect on competition, investment or innovation. If a rule is ‘‘major,’’ its effectiveness will generally be delayed for 60 days pending Congressional review. The Commission requests comment on the potential impact of the amendments to Rules 17a–5(f) and (j) and Rules 18a–6(e) and (g) on: 1. The U.S. economy on an annual basis, 2. Any potential increase in costs or prices for consumers or individual industries, and 3. Any potential effect on competition, investment, or innovation. Commenters are requested to provide empirical data and other factual support for their view to the extent possible. VIII. Statutory Authority The Commission is revising Rules 17a–4 and 18a–6 under the Exchange Act (17 CFR 240.17a–4 and 17 CFR 240.18a–6) pursuant to the authority conferred by the Exchange Act, including Sections 15F and 17. 201 Public Law 104–121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601). E:\FR\FM\01DEP2.SGM 01DEP2 68326 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules (1) All modifications to and deletions of a record or any part thereof; Brokers, Confidential business (2) The date and time of operator information, Fraud, Reporting and entries and actions that create, modify, recordkeeping requirements, Securities. or delete the record; (3) The individual(s) creating, Text of Rule Amendments modifying, or deleting the record; and For the reasons set out in the (4) Any other information needed to preamble, the Commission is proposing maintain an audit trail of each distinct to amend title 17, chapter II of the Code record in a way that maintains security, of Federal Regulations as follows: signatures, and data to ensure the authenticity and reliability of the record PART 240—GENERAL RULES AND and will permit re-creation of the REGULATIONS, SECURITIES original record and interim iterations of EXCHANGE ACT OF 1934 the record; or (B) Preserve the records exclusively in ■ 1. The authority citation for part 240 a non-rewriteable, non-erasable format; continues to read, in part, as follows: (ii) Verify automatically the Authority: 15 U.S.C. 77c, 77d, 77g, 77j, completeness and accuracy of the 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, processes for storing and retaining 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, records electronically; 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, (iii) If applicable, serialize the original 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, and duplicate units of the storage 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– media, and time-date for the required 3, 80b–4, 80b–11, and 7201 et seq., and 8302; period of retention the information 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 placed on such electronic storage media; U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat. and 1376 (2010); and Pub. L. 112–106, sec. 503 (iv) Have the capacity to readily and 602, 126 Stat. 326 (2012), unless download and transfer copies of a otherwise noted. record and its audit trail (if applicable) * * * * * in both a human readable format and in Section 240.17a–4 also issued under secs. a reasonably usable electronic format 2, 17, 23(a), 48 Stat. 897, as amended; 15 U.S.C. 78a, 78d–1, 78d–2; sec. 14, Pub. L. 94– and to readily download and transfer the information needed to locate the 29, 89 Stat. 137 (15 U.S.C. 78a); sec. 18, Pub. electronic record, as required by the L. 94–29, 89 Stat. 155 (15 U.S.C. 78w); staffs of the Commission, the self* * * * * regulatory organizations of which the ■ 2. Amend § 240.17a–4 by revising member, broker, or dealer is a member, paragraphs (f) and (j) to read as follows: or any State securities regulator having § 240.17a–4 Records to be preserved by jurisdiction over the member, broker or certain exchange members, brokers and dealer. dealers. (3) A member, broker, or dealer using * * * * * an electronic recordkeeping system (f) The records required to be must: (i) At all times have available, for maintained and preserved pursuant to examination by the staffs of the §§ 240.17a–3 and 240.17a–4 may be immediately produced or reproduced by Commission, the self-regulatory organizations of which the member, means of an electronic recordkeeping broker, or dealer is a member, or any system or by means of micrographic media subject to the conditions set forth State securities regulator having in this paragraph and be maintained and jurisdiction over the member, broker or dealer facilities for immediate preserved for the required time in that production of records preserved by form. (1) For purposes of this paragraph, means of the electronic recordkeeping (i) The term micrographic media system and for producing copies of means microfilm or microfiche, or any those records; (ii) Be ready at all times to provide, similar medium; and (ii) The term electronic recordkeeping and immediately provide, any record or system means a system that preserves information needed to locate records records in a digital format and that stored by means of the electronic requires a computer to access the recordkeeping system that the staffs of records. the Commission, the self-regulatory (2) An electronic recordkeeping organizations of which the member, system must: broker, or dealer is a member, or any (i)(A) Preserve the records for the State securities regulator having duration of their applicable retention jurisdiction over the member, broker or periods in a manner that maintains a dealer may request; (iii) Maintain a backup electronic complete time-stamped audit trail that recordkeeping system that meets the includes: lotter on DSK11XQN23PROD with PROPOSALS2 List of Subjects in 17 CFR Part 240 VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 other requirements of this paragraph (f) and that retains the records required to be maintained and preserved pursuant to §§ 240.17a–3 and 240.17a–4 in accordance with this section; (iv) Organize and maintain information necessary to locate records maintained by the electronic recordkeeping system; (v)(A) Have in place an auditable system of controls that records, among other things: (1) Each input, alteration, or deletion of a record; (2) The names of individuals inputting, altering, or deleting a record; and (3) The date and time such individuals input, altered, or deleted the record; (B) At all times be able to produce a record of the results of the audit of the system of controls for examination by the staffs of the Commission, the selfregulatory organizations of which the member, broker, or dealer is a member, or any State securities regulator having jurisdiction over the member, broker or dealer; and (C) Preserve the record of the results of the audit of the system of controls for the retention period required for the associated records; (vi) Maintain, keep current, and provide promptly upon request by the staffs of the Commission, the selfregulatory organizations of which the member, broker, or dealer is a member, or any State securities regulator having jurisdiction over the member, broker or dealer all information necessary to access and locate records preserved by means of the electronic recordkeeping system; and (vii) Have at all times a senior officer of the member, broker, or dealer (hereinafter, the ‘‘undersigned’’), who has independent access to and the ability to provide records maintained and preserved on the electronic recordkeeping system, file with the designated examining authority for the member, broker or dealer the following undertakings with respect to such records: The undersigned hereby undertakes to furnish promptly to the U.S. Securities and Exchange Commission (‘‘Commission’’), its designees or representatives, any selfregulatory organization of which [Name of the Member, Broker, or Dealer] is a member, or any State securities regulator having jurisdiction over [Name of the Member, Broker, or Dealer], upon reasonable request, such information as is deemed necessary by the staff of the Commission, any selfregulatory organization of which [Name of the Member, Broker, or Dealer] is a member, or any State securities regulator having jurisdiction over [Name of the Member, Broker, or Dealer], and to download copies of E:\FR\FM\01DEP2.SGM 01DEP2 lotter on DSK11XQN23PROD with PROPOSALS2 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules a record and its audit trail (if applicable) preserved by means of an electronic recordkeeping system of [Name of the Member, Broker, or Dealer] into both a human readable format and a reasonably usable electronic format in the event of a failure on the part of [Name of the Member, Broker, or Dealer] to download a requested record or its audit trail (if applicable). Furthermore, the undersigned hereby undertakes to take reasonable steps to provide access to the information preserved by means of an electronic recordkeeping system of [Name of the Member, Broker, or Dealer], including, as appropriate, downloading any record required to be maintained and preserved by [Name of the Member, Broker, or Dealer] pursuant to §§ 240.17a–3 and 240.17a–4 in a format acceptable to the staff of the Commission, any self-regulatory organization of which [Name of the Member, Broker, or Dealer] is a member, or any State securities regulator having jurisdiction over [Name of the Member, Broker, or Dealer]. Specifically, the undersigned will take reasonable steps that, in the event of a failure on the part of [Name of the Member, Broker, or Dealer] to download the record into a human readable format or a reasonably usable electronic format and after reasonable notice to [Name of the Member, Broker, or Dealer], the undersigned will download the record into a human readable format or a reasonably usable electronic format at the request of the staff of the staffs of the Commission, any selfregulatory organization of which [Name of the Member, Broker, or Dealer] is a member, or any State securities regulator having jurisdiction over [Name of the Member, Broker, or Dealer]. regulatory organizations of which the broker or dealer is a member, and any State securities regulator having jurisdiction over the member, broker or dealer. (B) Each index must be duplicated and the duplicate copies must be stored separately from the original copy of each index. (C) Original and duplicate indexes must be preserved for the time required for the indexed records. * * * * * (j) Every member, broker and dealer subject to this section must furnish promptly to a representative of the Commission legible, true, complete, and current copies of those records of the member, broker or dealer that are required to be preserved under this section, or any other records of the member, broker or dealer subject to examination under section 17(b) of the Act (15 U.S.C. 78q(b)) that are requested by the representative of the Commission. The member, broker, or dealer must furnish a record and its audit trail (if applicable) preserved on an electronic recordkeeping system pursuant to paragraph (f) of this section in a reasonably usable electronic format, if requested by a representative of the Commission. * * * * * ■ 3. Amend § 240.18a–6 by revising paragraphs (e) and (g) to read as follows: (4) A broker-dealer using a micrographic media system must: (i) At all times have available, for examination by the staffs of the Commission, self-regulatory organizations of which it is a member, and any State securities regulator having jurisdiction over the member, broker or dealer, facilities for immediate, easily readable projection or production of micrographic media and for producing easily readable images; (ii) Be ready at all times to provide, and immediately provide, any facsimile enlargement which the staffs of the Commission, any self-regulatory organization of which it is a member, or any State securities regulator having jurisdiction over the member, broker or dealer may request; (iii) Store, separately from the original, a duplicate copy of the record stored on any medium acceptable under § 240.17a–4 for the time required; and (iv) Organize and index accurately all information maintained on both original and duplicate storage media. (A) At all times, a member, broker, or dealer must be able to have such indexes available for examination by the staffs of the Commission, the self- § 240.18a–6 Records to be preserved by certain security-based swap dealers and major security-based swap participants. VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 * * * * * (e) The records required to be maintained and preserved pursuant to §§ 240.18a–5 and 240.18a–6 may be immediately produced or reproduced by means of an electronic recordkeeping system subject to the conditions set forth in this paragraph and be maintained and preserved for the required time in that form. (1) For purposes of this paragraph, the term electronic recordkeeping system means a system that preserves records in a digital format and that requires a computer to access the records. (2) An electronic recordkeeping system of a security-based swap dealer or major security-based swap participant without a prudential regulator must: (i)(A) Preserve the records for the duration of their applicable retention periods in a manner that maintains a complete time-stamped audit trail that includes: (1) All modifications to and deletions of a record or any part thereof; PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 68327 (2) The date and time of operator entries and actions that create, modify, or delete the record; (3) The individual(s) creating, modifying, or deleting the record; and (4) Any other information needed to maintain an audit trail of each distinct record in a way that maintains security, signatures, and data to ensure the authenticity and reliability of the record and will permit re-creation of the original record and interim iterations of the record; or (B) Preserve the records exclusively in a non-rewriteable, non-erasable format; (ii) Verify automatically the completeness and accuracy of the processes for storing and retaining records electronically; (iii) If applicable, serialize the original and duplicate units of the storage media, and time-date for the required period of retention the information placed on such electronic storage media; and (iv) Have the capacity to readily download and transfer copies of a record and its audit trail (if applicable) in both a human readable format and in a reasonably usable electronic format and to readily download and transfer the information needed to locate the electronic record, as required by the staffs of the Commission, or any State regulator having jurisdiction over the security-based swap dealer or major security-based swap participant. (3) A security-based swap dealer or major security-based swap participant using an electronic recordkeeping system must: (i) At all times have available, for examination by the staffs of the Commission or any State regulator having jurisdiction over the securitybased swap dealer or major securitybased swap participant, facilities for immediate production of records preserved by means of the electronic recordkeeping system and for producing copies of those records; (ii) Be ready at all times to provide, and immediately provide, any record or information needed to locate records stored by means of the electronic recordkeeping system that the staffs of the Commission or any State regulator having jurisdiction over the securitybased swap dealer or major securitybased swap participant may request; (iii) Maintain a backup electronic recordkeeping system that meets the other requirements of this paragraph (e), as applicable, and that retains the records required to be maintained and preserved pursuant to §§ 240.18a–5 and 240.18a–6 in accordance with this section; E:\FR\FM\01DEP2.SGM 01DEP2 68328 Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules lotter on DSK11XQN23PROD with PROPOSALS2 (iv) Organize and maintain information necessary to locate records maintained by the electronic recordkeeping system; and (v)(A) Have in place an auditable system of controls that records, among other things: (1) Each input, alteration, or deletion of a record; (2) The names of individuals inputting, altering, or deleting a record; and (3) The date and time such individuals input, altered, or deleted the record; (B) At all times be able to produce a record of the results of the audit of the system of controls for examination by the staffs of the Commission or any State regulator having jurisdiction over the security-based swap dealer or major security-based swap participant; and (C) Preserve the record of the results of the audit of the system of controls for the retention period required for the associated records; (vi) Maintain, keep current, and provide promptly upon request by the staffs of the Commission or any State regulator having jurisdiction over the security-based swap dealer or major security-based swap participant all information necessary to access and locate records preserved by means of the electronic recordkeeping system; and (vii) Have at all times a senior officer of the security-based swap dealer or major security-based swap participant (hereinafter, the ‘‘undersigned’’), who has independent access to and the ability to provide records maintained and preserved on the electronic recordkeeping system, file with the Commission the following undertakings with respect to such records: VerDate Sep<11>2014 17:28 Nov 30, 2021 Jkt 256001 The undersigned hereby undertakes to furnish promptly to the U.S. Securities and Exchange Commission (‘‘Commission’’) and its designees or representatives, or any State securities regulator having jurisdiction over [Name of the Security-Based Swap Dealer or Major Security-Based Swap Participant], upon reasonable request, such information as is deemed necessary by the staff of the Commission or any State regulator having jurisdiction over [Name of the Security-Based Swap Dealer or Major Security-Based Swap Participant], to download copies of a record and its audit trail (if applicable) preserved by means of an electronic recordkeeping system of [Name of the Security-Based Swap Dealer or Major Security-Based Swap Participant] into both a human readable format and a reasonably usable electronic format in the event of a failure on the part of [Name of the Security-Based Swap Dealer or Major Security-Based Swap Participant] to download a requested record or its audit trail (if applicable). Furthermore, the undersigned hereby undertakes to take reasonable steps to provide access to the information preserved by means of an electronic recordkeeping system of [Name of the Security-Based Swap Dealer or Major Security-Based Swap Participant], including, as appropriate, downloading any record required to be maintained and preserved by [Name of the Security-Based Swap Dealer or Major Security-Based Swap Participant] pursuant to §§ 240.18a–5 and 240.18a–6 in a format acceptable to the staff of the Commission or any State regulator having jurisdiction over [Name of the Security-Based Swap Dealer or Major Security-Based Swap Participant]. Specifically, the undersigned will take reasonable steps that, in the event of a failure on the part of [Name of the Security-Based Swap Dealer or Major Security-Based Swap Participant] to download the record into a human readable format or a reasonably usable electronic format and after reasonable notice to [Name of the Security-Based Swap PO 00000 Frm 00030 Fmt 4701 Sfmt 9990 Dealer or Major Security-Based Swap Participant], the undersigned will download the record into a human readable format or a reasonably usable electronic format at the request of the staff of the Commission or any State regulator having jurisdiction [Name of the Security-Based Swap Dealer or Major Security-Based Swap Participant]. * * * * * (g) Every security-based swap dealer and major security-based swap participant subject to this section must furnish promptly to a representative of the Commission legible, true, complete, and current copies of those records of the security-based swap dealer or major security-based swap participant that are required to be preserved under this section, or any other records of the security-based swap dealer or major security-based swap participant subject to examination or required to be made or maintained pursuant to section 15F of the Act that are requested by a representative of the Commission. The security-based swap dealer and major security-based swap participant must furnish a record and its audit trail (if applicable) preserved on an electronic recordkeeping system pursuant to paragraph (e) of this section in a reasonably usable electronic format, if requested by a representative of the Commission. * * * * * By the Commission. Dated: November 18, 2021. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–25840 Filed 11–30–21; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\01DEP2.SGM 01DEP2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 228 (Wednesday, December 1, 2021)]
[Proposed Rules]
[Pages 68300-68328]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25840]



[[Page 68299]]

Vol. 86

Wednesday,

No. 228

December 1, 2021

Part II





Securities and Exchange Commission





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17 CFR Part 240





Electronic Recordkeeping Requirements for Broker-Dealers, Security-
Based Swap Dealers, and Major Security-Based Swap Participants; 
Proposed Rule

Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / 
Proposed Rules

[[Page 68300]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-93614; File No. S7-19-21]
RIN 3235-AM76


Electronic Recordkeeping Requirements for Broker-Dealers, 
Security-Based Swap Dealers, and Major Security-Based Swap Participants

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing amendments to the electronic recordkeeping requirements for 
broker-dealers, security-based swap dealers (``SBSDs''), and major 
security-based swap participants (``MSBSPs'').

DATES: Comments should be received on or before January 3, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include 
File Number S7-19-21 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-19-21. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (https://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Operating conditions may limit access to the 
Commission's public reference room. All comments received will be 
posted without change. Persons submitting comments are cautioned that 
we do not redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
publicly available.
    We or the staff may add studies, memoranda, or other substantive 
items to the comment file during this rulemaking. A notification of the 
inclusion in the comment file of any such materials will be made 
available on our website. To ensure direct electronic receipt of such 
notifications, sign up through the ``Stay Connected'' option at 
www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at 
(202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202) 
551-5522; Raymond A. Lombardo, Assistant Director, at (202) 551-5755; 
Joseph I. Levinson, Senior Special Counsel, at (202) 551-5598; or 
Timothy C. Fox, Branch Chief, at (202) 551-5687, Division of Trading 
and Markets, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to:

------------------------------------------------------------------------
           Commission reference                     CFR citation
------------------------------------------------------------------------
Rule 17a-4................................  17 CFR 240.17a-4.
Rule 18a-6................................  17 CFR 240.18a-6.
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Table of Contents

I. Background
    A. Introduction
    B. Current Electronic Record Preservation Requirements
    1. Rule 17a-4(f)
    2. Rule 18a-6(e)
    C. Current Prompt Production of Records Requirements
II. Proposed Amendments
    A. Introductory Text
    B. Definition of Electronic Recordkeeping System
    C. Elimination of Notice and Representation Requirements From 
Rule 17a-4(f)
    D. Requirements for Electronic Recordkeeping Systems
    E. Requirements for Broker-Dealers and SBS Entities Using 
Electronic Recordkeeping Systems
    F. Requirements for Broker-Dealers Using Micrographic Media To 
Preserve Records
    G. Requirement To Produce Electronic Records in a Reasonably 
Usable Electronic Format
III. Request for Comment
IV. Economic Analysis
    A. Baseline
    1. Broker-Dealers
    2. Security-Based Swap Markets: Activity and Participants
    3. Recordkeeping Practices of Market Participants
    B. Benefits of the Proposed Amendments
    C. Costs of the Proposed Amendments
    D. Reasonable Alternatives
    E. Effects on Efficiency, Competition, and Capital Formation
    F. Request for Comment
V. Paperwork Reduction Act
    A. Summary of Collections of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Initial and Annual Reporting Burdens
    E. Collection of Information Is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
    H. Request for Comments
VI. Initial Regulatory Flexibility Act Analysis
    A. Reasons for, and Objectives of, the Proposed Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Rules
    D. Reporting, Recordkeeping, and Other Compliance Requirements
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    G. Request for Comment
VII. Small Business Regulatory Enforcement Fairness Act
VIII. Statutory Authority

I. Background

A. Introduction

    Securities Exchange Act of 1934 (``Exchange Act'') Rule 17a-4 
(``Rule 17a-4'') \1\ sets forth record preservation requirements 
applicable to broker-dealers, including broker-dealers also registered 
as SBSDs or MSBSPs.\2\ Exchange Act Rule 18a-6 (``Rule 18a-6'') \3\ 
sets forth record preservation requirements for SBSDs and MSBSPs that 
are not also registered as broker-dealers (``SBS Entities'').\4\ The 
record preservation requirements of Rule 18a-6 were modeled largely on 
Rule 17a-4.\5\ Pursuant to Sections 15F and 17(a) of the Exchange Act, 
the Commission is proposing amendments to Rules 17a-4 and 18a-6.\6\ 
Specifically, the proposal

[[Page 68301]]

would amend the electronic record preservation and prompt production of 
records requirements of Rules 17a-4 and 18a-6.\7\
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    \1\ See 17 CFR 240.17a-4.
    \2\ As used in this release, the term ``broker-dealer'' includes 
broker-dealers that are also registered as SBSDs or MSBSPs.
    \3\ See 17 CFR 240.18a-6.
    \4\ As used in this release, the term ``SBS Entity'' refers to 
SBSDs and MSBSPs that are not also registered as broker-dealers.
    \5\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and 
Broker-Dealers, Exchange Act Release No. 87005 (Sept. 19, 2019), 84 
FR 68550 (Dec. 16, 2019) (``SBSD/MSBSP Recordkeeping Adopting 
Release'').
    \6\ Section 17(a) of the Exchange Act, in pertinent part, 
provides the Commission with authority to issue rules requiring 
broker-dealers to make and keep for prescribed periods such records 
as the Commission, by rule, prescribes as necessary or appropriate 
in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Exchange Act. See 15 
U.S.C. 78q(a). Section 15F(f)(1)(B)(i) of the Exchange Act provides 
that SBSDs and MSBSPs for which there is a prudential regulator 
shall keep books and records of all activities related to their 
business as an SBSD or MSBSP in such form and manner and for such 
period as may be prescribed by the Commission by rule or regulation. 
See 15 U.S.C. 78o-10(f)(1)(B)(i). Section 15F(f)(1)(B)(ii) of the 
Exchange Act provides that SBSDs and MSBSPs without a prudential 
regulator shall keep books and records in such form and manner and 
for such period as may be prescribed by the Commission by rule or 
regulation. See 15 U.S.C. 78o-10(f)(1)(B)(ii).
    \7\ See paragraph (f) of Rule 17a-4 and paragraph (e) of Rule 
18a-6 (setting forth the electronic record preservation 
requirements) and paragraph (j) of Rule 17a-4 and paragraph (g) of 
Rule 18a-6 (setting forth the prompt production of records 
requirements).
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    As discussed in greater detail in the sections below, the 
amendments to Rule 17a-4 would provide an audit-trail alternative to 
the current requirement that electronic records be preserved 
exclusively in a non-rewriteable, non-erasable format. The audit-trail 
alternative would require that firms preserve electronic records in a 
manner that permits the recreation of an original record if it is 
altered, over-written, or erased. Rule 18a-6 currently does not have a 
requirement to preserve electronic records: (1) In a manner that 
permits the recreation of an original record if it is altered, over-
written or erased; or (2) exclusively in a non-rewriteable, non-
erasable format. The amendments to Rule 18a-6 would provide that an 
electronic recordkeeping system of an SBS Entity without a prudential 
regulator (``nonbank SBS Entity'') must meet one of these two 
requirements. However, this proposed amendment would apply only to 
newly created records, and not to those created prior to the compliance 
date of proposed amendments, if adopted by the Commission.\8\
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    \8\ A nonbank SBSD would be able to apply the new requirements 
to legacy records by, for example, transferring them to an 
electronic recordkeeping system that preserves them: (1) In a manner 
that permits the recreation of an original record if it is altered, 
over-written or erased; or (2) exclusively in a non-rewriteable, 
non-erasable format.
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    Rule 17a-4 currently requires a broker-dealer to engage a third 
party who has access to and the ability to download information from 
the broker-dealer's electronic storage media to any acceptable medium 
under the rule. The third party must execute undertakings that it will 
provide access to the broker-dealer's electronic records and provide 
them to the Commission and other securities regulators upon request. 
Rule 18a-6 currently does not have this requirement. The amendments to 
Rule 17a-4 would eliminate the third-party access and undertakings 
requirements and replace them with a requirement that a senior officer 
of the broker-dealer provide the access and undertakings. The 
amendments to Rule 18a-6 would add an analogous senior officer access 
and undertakings requirement.
    The amendments to Rules 17a-4 and 18a-6 would require a broker-
dealer or SBS Entity, respectively, to furnish a record and its audit 
trail (if applicable) preserved on an electronic recordkeeping system 
pursuant to those rules in a reasonably usable electronic format, if 
requested by a representative of the Commission. This means the record 
would need to be produced in an electronic format that is compatible 
with commonly used systems for accessing and reading electronic 
records. Electronic records produced in a proprietary electronic format 
that Commission staff and other securities regulators could not read 
using commonly available systems for accessing and reading electronic 
records would not be considered to be in a reasonably usable electronic 
format.
    The amendments to Rule 17a-4 would eliminate a requirement that the 
broker-dealer notify its designated examining authority (``DEA'') 
before employing an electronic recordkeeping system. Finally, the 
amendments to Rules 17a-4 and 18a-6, among other things, would remove 
or replace text to make those rules more technology neutral and to 
improve readability.

B. Current Electronic Record Preservation Requirements

1. Rule 17a-4(f)
    Exchange Act Rule 17a-3 (``Rule 17a-3'') requires a broker-dealer 
to make and keep current certain books and records.\9\ The required 
records include, among other records: (1) Blotters (or other records of 
original entry) containing an itemized daily record of all purchases 
and sales of securities; (2) ledgers (or other records) reflecting all 
assets and liabilities, income and expense, and capital accounts; (3) a 
securities record or ledger reflecting separately for each security as 
of the clearance dates all ``long'' or ``short'' positions; (4) a 
memorandum of each brokerage order; (5) a memorandum of each purchase 
or sale of a security for the account of the broker-dealer; and (6) a 
record of proprietary options positions. Rule 17a-4 requires a broker-
dealer to preserve additional records if the broker-dealer makes or 
receives certain categories of records.\10\ These categories of records 
include, among other records, check books, bank statements, bills 
receivable or payable, communications relating to the broker-dealer's 
business as such, and written agreements. Rule 17a-4 also establishes 
retention periods for all records required to be made and kept current 
under Rule 17a-3 and preserved under Rule 17a-4 (generally three or six 
years). Additionally, Rule 17a-4 prescribes, among other things, how 
the records must be retained, including the requirements with respect 
to preserving records electronically.
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    \9\ See 17 CFR 240.17a-3.
    \10\ See, e.g., paragraphs (b)(2) through (16) of Rule 17a-4.
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    The electronic record preservation requirements are set forth in 
paragraph (f) of Rule 17a-4 (``Rule 17a-4(f)''). These requirements 
were adopted by the Commission in 1997.\11\ The Commission intended 
these requirements to be technology neutral but was guided by the 
predominant electronic storage method at that time: Using optical 
platters, CD-ROMs, or DVDs (collectively, ``optical disks'').\12\ In 
particular, the rule requires that the electronic recordkeeping system 
preserve the records exclusively in a ``non-rewriteable, non-erasable'' 
(also known as a ``write once, read many'' or ``WORM'') format. The 
objective of the WORM requirement is to prevent the alteration, over-
writing, or erasure of the records.
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    \11\ See Reporting Requirements for Brokers or Dealers under the 
Securities Exchange Act of 1934, Exchange Act Release No. 38245 
(Jan. 31, 1997), 62 FR 6469 (Feb. 12, 1997) (``Rule 17a-4(f) 
Adopting Release''). The Commission proposed Rule 17a-4(f) in 1993 
and at the same time the Commission staff published a no-action 
letter that the staff would not recommend enforcement action to the 
Commission if broker-dealers preserved required records using 
optical storage technology, subject to certain conditions. See 
Reporting Requirements for Brokers or Dealers under the Securities 
Exchange Act of 1934, Exchange Act Release No. 32609 (July 9, 1993), 
58 FR 38092 (July 15, 1993) (proposing Rule 17a-4(f)); Letter from 
Michael A. Macchiaroli, Associate Director, Division of Market 
Regulation, Commission, to Michael D. Udoff, Chairman, Ad Hoc Record 
Retention Committee, Securities Industry Association (June 18, 1993) 
(staff no-action letter). A staff no-action letter (or other staff 
statement) represents the views of the staff. It is not a rule, 
regulation, or statement of the Commission. The Commission has 
neither approved nor disapproved its content. The staff no-action 
letter, like all staff statements, has no legal force or effect: it 
does not alter or amend applicable law, and it creates no new or 
additional obligations for any person.
    \12\ See Rule 17a-4(f) Adopting Release, 62 FR at 6470.
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    In addition to the WORM requirement, Rule 17a-4(f) requires, among 
other things, that the broker-dealer: (1) Notify its DEA prior to 
employing electronic storage media and at least 90 days before 
employing electronic storage media other than optical disk technology; 
(2) use electronic storage media that (a) verifies

[[Page 68302]]

automatically the quality and accuracy of the recording process, (b) 
serializes the original and duplicate copies of the media, (c) time-
dates the required retention period for the records stored on the 
media, and (d) has the capacity to readily download indexes and records 
stored on the media; (3) have facilities for immediately and easily 
readable projection or production of electronically stored records; (4) 
be ready to immediately provide a facsimile enlargement of a record 
stored on the media; (5) organize and index accurately information 
stored on the media; (6) have in place an audit system providing 
accountability regarding the inputting of records to the media and 
making any changes to those records; (7) be ready to produce the 
information necessary to access the records; and (8) engage a third 
party who has access to and the ability to download the records and 
that executes written undertakings to do so upon the request of the 
Commission or other securities regulators.
    As to optical disks, firms can meet the WORM requirement by 
``burning'' data onto the disk, with the result that it cannot be 
altered, over-written, or erased, which means that this form of storage 
media cannot be reused.
    After the adoption of the WORM requirement, broker-dealers inquired 
about whether electronic storage recordkeeping systems that do not 
permanently ``burn'' records onto the storage media could meet the WORM 
requirement. Consequently, in 2003, the Commission issued an 
interpretation to clarify that the rule does not mandate the use of 
optical disks and, therefore, a broker-dealer can use ``an electronic 
storage system that prevents the overwriting, erasing or otherwise 
altering of a record during its required retention period through the 
use of integrated hardware and software codes'' (``Rule 17a-4(f) 
Interpretation'').\13\ The Rule 17a-4(f) Interpretation noted that 
electronic recordkeeping systems then in use employed integrated 
hardware and software codes that prevent the alteration, overwriting, 
or erasure of records during their required retention periods, and that 
the codes could not be turned off to remove this feature.\14\ 
Therefore, while the hardware storage medium used by these systems 
(i.e., magnetic disk) is inherently re-writeable, the integrated codes 
intrinsic to the system prevent the records from being altered, over-
written, or erased during the record's required retention period.\15\ 
The Rule 17a-4(f) Interpretation clarified that broker-dealers need not 
rely on a hardware solution to meet the WORM requirement (e.g., the 
burning of data onto an optical disk) but rather could rely on a 
solution that prevents records from being altered, over-written, or 
erased during their required retention period under Rule 17a-4 (e.g., 
three or six years).\16\ The Commission stated that its Rule 17a-4(f) 
Interpretation did not include electronic recordkeeping systems that 
mitigate the risk that records will be altered, over-written, or 
erased, but do not prevent alteration, over-writing, or erasure of the 
records.\17\
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    \13\ See Electronic Storage of Broker-Dealer Records, Exchange 
Act Release No. 47806 (May 7, 2003), 68 FR 25281, 25282 (May 12, 
2003).
    \14\ Rule 17a-4(f) Interpretation, 68 FR at 25282.
    \15\ Id.
    \16\ Id. at 25282-83.
    \17\ See id. The Commission identified mitigating factors such 
as limiting access to the records as being insufficient on their 
own.
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    In the release adopting Rule 18a-6, the Commission further refined 
its interpretation of the WORM requirement of Rule 17a-4(f).\18\ In 
particular, the Rule 17a-4 Interpretation provided that the WORM 
requirement does not mandate a hardware solution (i.e., permanently 
``burning'' records onto an optical disk). However, because the Rule 
17a-4 Interpretation described a process of integrated software and 
hardware codes, broker-dealers questioned whether they could use a 
system that relied solely on software codes to meet the WORM 
requirement. The Commission clarified that ``a software solution that 
prevents the overwriting, erasing, or otherwise altering of a record 
during its required retention period would meet the requirements of the 
rule.'' \19\
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    \18\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 
68568.
    \19\ Id.
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    In 2017, a group of trade associations filed a petition for 
rulemaking with the Commission.\20\ The petition requested that the 
Commission replace the WORM requirement with more liberal ``principle-
based requirements'' similar to amendments the Commodity Futures 
Trading Commission (``CFTC'') had made to its electronic recordkeeping 
rule.\21\ The Commission has carefully considered prior comments it 
received relating to broker-dealer electronic recordkeeping. As 
discussed below, the Commission is proposing to add an alternative to 
the WORM requirement that would require a broker-dealer's electronic 
recordkeeping system to preserve electronic records in a manner that 
permits the recreation of an original record if it is altered, over-
written, or erased. While this proposal would not rely on ``principle-
based requirements'' to protect the reliability and authenticity of 
electronic records, it is designed to address concerns raised by 
commenters about the WORM requirement.\22\
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    \20\ See Petition 4-713 (Nov. 14, 2017) filed by the Securities 
Industry Financial Markets Association, Financial Services 
Roundtable, Futures Industry Association, International Swaps 
Derivatives Association, and Financial Services Institute available 
at https://www.sec.gov/rules/petitions/2017/petn4-713.pdf (``Rule 
17a-4(f) Rulemaking Petition''). An addendum to the Rule 17a-4(f) 
Rulemaking Petition was filed on May 24, 2018, available at https://www.sec.gov/rules/petitions/2018/ptn4-713-addendum.pdf (``Rule 17a-
4(f) Rulemaking Petition Addendum''). Comments on the petition were 
received and are available at https://www.sec.gov/comments/4-713/4-713.htm.
    \21\ See CFTC, Recordkeeping, 82 FR 24479 (May 30, 2017) (``CFTC 
Electronic Recordkeeping Release'').
    \22\ See section II.D. of this release (discussing how this 
proposed alternative is designed to address concerns raised about 
the WORM requirement).
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2. Rule 18a-6(e)
    In 2019, the Commission adopted Exchange Act Rules 18a-5 (``Rule 
18a-5'') \23\ and 18a-6 to establish recordkeeping requirements for SBS 
Entities. These rules were modeled on Rules 17a-3 and 17a-4, 
respectively.\24\ The electronic preservation requirements of Rule 18a-
6 are set forth in paragraph (e) of the rule (``Rule 18a-6(e)''). Rule 
18a-6(e) was modeled on Rule 17a-4(f).\25\ As proposed, Rule 18a-6(e) 
would have included the WORM requirement.\26\ However, commenters 
requested that that the Commission not mandate that electronic records 
be preserved exclusively in a WORM format and not expand the WORM 
requirement to SBS Entities at that time.\27\ Commenters also requested 
that the Commission act on the Rule 17a-4(f) Rulemaking Petition.\28\ 
The Commission ultimately did not include the WORM requirement or any 
similar requirement when adopting Rule 18a-6(e). The Commission stated 
that ``any change to the [WORM requirement] should be addressed in a 
separate regulatory initiative in which the Commission intends to 
consider electronic storage

[[Page 68303]]

media issues.'' \29\ Further, the Commission recognized that SBS 
Entities may have existing recordkeeping systems that did not meet the 
WORM requirement and, therefore, could incur substantial costs building 
a recordkeeping system that meets the requirement.\30\ For these 
reasons, Rule 18a-6(e) does not include the WORM requirement or the 
requirement to provide notice before employing an electronic storage 
system, including a 90-day notice before employing an electronic 
storage system that does not use optical disk technology.\31\ Rule 18a-
6(e) also does not include provisions of Rule 17a-4(f) that are 
tailored for the WORM requirement (particularly to the use of optical 
disk technology to meet the requirement).\32\
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    \23\ 17 CFR 240.18a-5.
    \24\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 
68552-71.
    \25\ See id. at 68567-69.
    \26\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and 
Broker-Dealers; Capital Rule for Certain Security-Based Swap 
Dealers, Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR 
25194, 25219, 25312 (May 2, 2014) (``SBSD/MSBSP Recordkeeping 
Proposing Release'').
    \27\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 
68568.
    \28\ Id.
    \29\ Id.
    \30\ Id.
    \31\ Id.
    \32\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 
68568-69.
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    In addition to these differences from Rule 17a-4(f), Rule 18a-6(e) 
does not include the requirement that the firm engage a third party who 
has the ability to access the records and who undertakes to do so at 
the request of the Commission. The Commission cited comments stating 
that this requirement ``needlessly exposes firms to data leakage and 
cybersecurity threats.'' \33\
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    \33\ Id. at 68569.
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    In this rulemaking, the Commission is considering electronic 
recordkeeping systems of broker-dealers and, therefore, believes it is 
appropriate to also consider electronic recordkeeping systems of SBS 
Entities. As discussed below, the Commission is proposing amendments to 
Rule 18a-6(e) that largely would align with the requirements of Rule 
17a-4(f), as proposed to be amended.

C. Current Prompt Production of Records Requirements

    Paragraph (j) of Rule 17a-4 (``Rule 17a-4(j)'') requires broker-
dealers to furnish promptly to the Commission legible, true, complete, 
and current copies of those records of the firm that are required to be 
preserved under Rule 17a-4 or any other record of the firm that is 
subject to examination under Section 17(b) of the Exchange Act.\34\ 
Paragraph (g) of Rule 18a-6 (``Rule 18a-6(g)'') requires SBS Entities 
to furnish promptly to a representative of the Commission legible, 
true, complete, and current copies of those records of the firm that 
are required to be preserved under Rule 18a-6, or any other records of 
the firm subject to examination or required to be made or maintained 
pursuant to Section 15F of the Exchange Act.\35\
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    \34\ Section 17(b) of the Exchange Act provides, in pertinent 
part, that all records of a broker-dealer are subject at any time, 
or from time to time, to such reasonable periodic, special, or other 
examinations by representatives of the Commission and the 
appropriate regulatory agency for such persons as the Commission or 
the appropriate regulatory agency for such persons deems necessary 
or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the 
Exchange Act. See 15 U.S.C. 78q(b).
    \35\ Section 15F(f)(1) of the Exchange Act provides, in 
pertinent part, that SBSDs and MSBSPs shall keep books and records 
required by Commission rule open to inspection and examination by 
any representative of the Commission. See 15 U.S.C. 78o-10(f)(1).
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II. Proposed Amendments

A. Introductory Text

    The introductory text of Rule 17a-4(f) provides, in pertinent part, 
that the records required to be maintained and preserved pursuant to 
Rules 17a-3 and 17a-4 may be immediately produced or reproduced on 
``micrographic media'' or by means of ``electronic storage media'' that 
meet the conditions set forth in the rule and be maintained and 
preserved for the required time in that form. The term ``micrographic 
media'' refers to microfilm, microfiche, or any similar medium.\36\
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    \36\ See paragraph (f)(1)(i) of Rule 17a-4 (defining the term 
``micrographic media'').
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    The introductory text of Rule 18a-6(e) provides, in pertinent part, 
that the records required to be maintained and preserved pursuant to 
Rules 18a-5 and 18a-6 may be immediately produced or reproduced by 
means of an electronic storage system that meets the conditions set 
forth in the rule and be maintained and preserved for the required time 
in that form. This text diverges from Rule 17a-4(f) in two material 
respects. First, it does not refer to ``micrographic media.'' When 
proposing Rule 18a-6(e), the Commission expressed a preliminary belief 
that SBS Entities would not use micrographic media because electronic 
storage media is more technologically advanced and offers greater 
flexibility in managing records.\37\ The Commission also expressed a 
preliminary belief that most broker-dealers use electronic storage 
media rather than micrographic media for the same reasons.\38\ The 
Commission reiterated these beliefs when adopting Rule 18a-6(e) and, 
consequently, that rule does not include a micrographic media option 
for preserving records.\39\
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    \37\ See SBSD/MSBSP Recordkeeping Proposing Release, 79 FR at 
25219.
    \38\ Id. at 25219, n.378.
    \39\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 
68550. As discussed below, Rule 17a-4(f), as proposed to be amended, 
would retain provisions governing the use of micrographic media but 
move them to a new paragraph (f)(4) of the rule.
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    The second way in which the introductory text of Rule 18a-6(e) 
diverges from Rule 17a-4(f) in a material way is that the former refers 
to an electronic storage system rather than electronic storage media. 
As proposed, Rule 18a-6(e) would have used the term ``electronic 
storage media.'' \40\ However, when adopting Rule 18a-6(e), the 
Commission explained that the phrase ``electronic storage media'' was 
replaced with the phrase ``electronic storage system'' throughout the 
rule to clarify that the final rule does not require the use of a 
particular storage medium such as optical disk or CD-ROM.\41\
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    \40\ See SBSD/MSBSP Recordkeeping Proposing Release, 79 FR at 
25312.
    \41\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 
68550.
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    The Commission is proposing amendments to the introductory text of 
Rule 17a-4(f) to make the rule more technology neutral. In particular, 
the phrase ``electronic storage media'' would be replaced with the 
phrase ``electronic recordkeeping system'' throughout the rule, 
including in the introductory text. The Commission is proposing a 
conforming amendment to Rule 18a-6(e) to replace the phrase 
``electronic storage system'' with the phrase ``electronic 
recordkeeping system'' throughout the rule, including in the 
introductory text. The Commission preliminarily believes that the 
phrase ``electronic recordkeeping system'' better characterizes a 
system that produces and preserves records electronically. The term 
``electronic storage media'' generally refers to the devices (hardware) 
used to store data (e.g., floppy disks, optical disks, universal serial 
bus (USB) drives, and magnetic disks). The Commission believes 
``electronic recordkeeping system'' is a more accurate term because it 
would encompass both the hardware and software used to store records 
electronically. Consistent with this proposal, the amendments to Rule 
18a-6(e) would replace the term ``electronic storage system'' 
throughout the rule with the term ``electronic recordkeeping system,'' 
including in the introductory text. In addition, the Commission is 
proposing amendments to the introductory text of Rules 17a-4(f) and 
18a-6(e) solely to improve clarity and readability, but that otherwise 
are not intended to alter the meaning of either introductory text.\42\
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    \42\ The proposed amendments to Rule 17a-4(f) would replace the 
current introductory text that reads ``(f) The records required to 
be maintained and preserved pursuant to Sec. Sec.  240.17a-3 and 
240.17a-4 may be immediately produced or reproduced on 
``micrographic media'' (as defined in this section) or by means of 
``electronic storage media'' (as defined in this section) that meet 
the conditions set forth in this section and be maintained and 
preserved for the required time in that form'' with text that reads 
``(f) The records required to be maintained and preserved pursuant 
to Sec. Sec.  240.17a-3 and 240.17a-4 may be immediately produced or 
reproduced by means of an electronic recordkeeping system or by 
means of micrographic media subject to the conditions set forth in 
this paragraph and be maintained and preserved for the required time 
in that form.'' The proposed amendments to Rule 18a-6(e) would 
replace the current introductory text that reads ``(e) The records 
required to be maintained and preserved pursuant to Sec. Sec.  
240.18a-5 and 240.18a-6 may be immediately produced or reproduced by 
means of an electronic storage system (as defined in this paragraph 
(e)) that meets the conditions set forth in this paragraph (e) and 
be maintained and preserved for the required time in that form'' 
with text that reads ``(e) The records required to be maintained and 
preserved pursuant to Sec. Sec.  240.18a-5 and 240.18a-6 may be 
immediately produced or reproduced by means of an electronic 
recordkeeping system subject to the conditions set forth in this 
paragraph and be maintained and preserved for the required time in 
that form.''

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[[Page 68304]]

B. Definition of Electronic Recordkeeping System

    Paragraphs (f)(1)(i) and (ii) of Rule 17a-4 currently define the 
terms ``micrographic media'' and ``electronic storage media,'' 
respectively. Paragraph (e)(1) of Rule 18a-6 defines the term 
``electronic storage system.'' Paragraph (f)(1)(ii) of Rule 17a-4 
defines the term ``electronic storage media'' as, in pertinent part, 
any digital storage medium or system that meets the requirements of the 
rule. Paragraph (e)(1) of Rule 18a-6 defines the term ``electronic 
storage system'' as, in pertinent part, any digital storage system that 
meets the requirements of the rule. As discussed above, the Commission 
is proposing to use the term ``electronic recordkeeping system'' in 
Rules 17a-4(f) and 18a-6(e). Consequently, the Commission is proposing 
to define the term ``electronic recordkeeping system'' in both rules as 
``a system that preserves records in a digital format and that requires 
a computer to access the records.'' \43\ The Commission preliminarily 
believes this definition better describes a system that produces and 
preserves records electronically.\44\ For these reasons, the proposed 
amendments to Rules 17a-4(f) and 18a-6(e) would replace the definitions 
of ``electronic storage media'' and ``electronic storage system'' in 
those rules, respectively, with this definition of ``electronic 
recordkeeping system.''
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    \43\ See paragraph (f)(1)(ii) of Rule 17a-4 and paragraph (e)(1) 
of Rule 18a-6, as proposed to be amended.
    \44\ See 36 CFR 1220.18 (regulation of the U.S. National 
Archives and Records Administration defining ``electronic record,'' 
in pertinent part, as ``any information that is recorded in a form 
that only a computer can process'' and defining ``recordkeeping 
system'' as a ``a manual or electronic system that captures, 
organizes, and categorizes records to facilitate their preservation, 
retrieval, use, and disposition'').
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C. Elimination of Notice and Representation Requirements From Rule 17a-
4(f)

    Paragraph (f)(2)(i) of Rule 17a-4 requires a broker-dealer to 
notify its DEA prior to employing electronic storage media, including a 
90-day notice if the broker-dealer intends to employ electronic storage 
media other than optical disk technology. Paragraph (f)(2)(i) also 
requires a representation from the broker-dealer or the storage medium 
vendor or another third party with appropriate expertise that the 
selected electronic storage medium meets the conditions set forth in 
paragraph (f)(2)(ii), which are discussed below.
    The Commission is proposing to eliminate these notification and 
representation requirements from Rule 17a-4(f). The Commission 
preliminarily believes they are no longer necessary. They were adopted 
at a time when the use of electronic recordkeeping systems by broker-
dealers to meet the record preservation requirements of Rule 17a-4 was 
a relatively new phenomenon.\45\ The requirements alerted the broker-
dealer's DEA of the firm's intent to use electronic storage media to 
meet the record preservation requirements of Rule 17a-4. Given that the 
Commission and broker-dealer DEAs now have over 25 years of experience 
with broker-dealers using electronic recordkeeping systems, these 
requirements may no longer serve a useful purpose. As noted above, the 
Commission did not include analogous requirements in Rule 18a-6(e).
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    \45\ As discussed above, Rule 17a-4(f) was adopted in 1997.
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D. Requirements for Electronic Recordkeeping Systems

    Paragraphs (f)(2)(ii)(A) through (D) of Rule 17a-4 set forth 
technical requirements for electronic storage media if used by a 
broker-dealer to meet the record preservation requirements of Rule 17a-
4. Similarly, paragraphs (e)(2)(i) through (iii) of Rule 18a-6 set 
forth technical requirements for an electronic storage system if used 
by an SBS Entity to meet the record preservation requirements of Rule 
18a-6. As discussed below, the Commission is proposing amendments to 
these requirements.\46\
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    \46\ In addition to the proposed amendments discussed below, the 
Commission is proposing to simplify the introductory text of 
paragraphs (f)(2) and (e)(2) of Rules 17a-4 and 18a-6, respectively. 
In particular, the introductory text of paragraph (f)(2) of Rule 
17a-4 (which provides that ``If electronic storage media is used by 
a member, broker, or dealer, it must comply with the following 
requirements:'') and paragraph (f)(2)(ii) of Rule 17a-4 (which 
provides that ``The electronic storage media must:'') would be 
simplified to a single introductory text for paragraph (f)(2) 
providing that ``An electronic recordkeeping system must:''). The 
introductory text of paragraph (e)(2) of Rule 18a-6 (providing that 
``If an electronic storage system is used by a security-based swap 
dealer or major security-based swap participant, it must:'') would 
be modified to provide that ``An electronic recordkeeping system of 
a security-based swap dealer or major security-based swap 
participant without a prudential regulator must:''. The amendments 
to paragraph (f)(2) of Rule 17a-4 would result in the following 
numbering changes: (1) The new audit-trail requirement would be set 
forth in paragraph (f)(2)(i)(A) of Rule 17a-4, as proposed to be 
amended; (2) the existing WORM requirement of paragraph 
(f)(2)(ii)(A) of Rule 17a-4 would be set forth in paragraph 
(f)(2)(i)(B) of Rule 17a-4, as proposed to be amended; (3) the 
amended requirement of paragraph (f)(2)(ii)(B) of Rule 17a-4 would 
be set forth in paragraph (f)(2)(ii) of Rule 17a-4, as proposed to 
be amended; (4) the amended requirement of paragraph (f)(2)(ii)(C) 
of Rule 17a-4 would be set forth in paragraph (f)(2)(iii) of Rule 
17a-4, as proposed to be amended; and (5) the amended requirement of 
paragraph (f)(2)(ii)(D) of Rule 17a-4 would be set forth in 
paragraph (f)(2)(iv) of Rule 17a-4, as proposed to be amended. The 
amendments to paragraph (e)(2) of Rule 18a-6 would result in the 
following numbering changes: (1) The new audit-trail and WORM 
alternative requirements would be set forth in paragraphs 
(e)(2)(i)(A) and (B), respectively, of Rule 18a-6, as proposed to be 
amended; (2) the amended requirement of paragraph (e)(2)(i) of Rule 
18a-6 would be set forth in paragraph (e)(2)(ii) of Rule 18a-6, as 
proposed to be amended; (3) the amended requirement of paragraph 
(e)(2)(ii) of Rule 18a-6 would be set forth in paragraph (e)(2)(iii) 
of Rule 18a-6, as proposed to be amended; and (4) the amended 
requirement of paragraph (e)(2)(iii) of Rule 18a-6 would be set 
forth in paragraph (e)(2)(iv) of Rule 18a-6, as proposed to be 
amended.
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    As a preliminary matter, the requirements for electronic 
recordkeeping systems in Rule 17a-4(f) would apply to all broker-
dealers. However, the Commission is proposing to limit the application 
of the requirements for electronic recordkeeping systems in paragraph 
(e)(2) of Rule 18a-6 to nonbank SBS Entities, that is, SBS Entities 
without a prudential regulator. SBS Entities with a prudential 
regulator (``bank SBS Entities'') would therefore not be subject to the 
requirements of paragraph (e)(2) of Rule 18a-6, as proposed to be 
amended.\47\ Unlike nonbank SBS Entities, bank SBS Entities are subject 
to oversight and supervision by the banking agencies with respect to 
record preservation. This oversight and supervision may now or in the 
future include regulations or guidance with respect to requirements for 
electronic recordkeeping systems that differ from the proposed 
requirements for electronic recordkeeping systems

[[Page 68305]]

discussed below.\48\ In particular, the proposal to amend the 
requirements for electronic recordkeeping systems in paragraph (e)(2) 
of Rule 18a-6 to add the audit-trail and WORM alternative requirements 
could impose requirements that conflict with regulations or guidance of 
the prudential regulators. Further, the recordkeeping requirements of 
Rules 18a-5 and 18a-6 applicable to bank SBS Entities are more limited 
in scope because: (1) The Commission's authority under Section 
15F(f)(1)(B)(i) of the Exchange Act is tied to activities related to 
the conduct of the firm's business as an SBS Entity; (2) bank SBS 
Entities are subject to recordkeeping requirements applicable to banks 
with respect to their banking activities; and (3) the prudential 
regulators--rather than the Commission--are responsible for capital, 
margin, and other prudential requirements applicable to bank SBS 
Entities.\49\ For these reasons, the Commission preliminarily believes 
that it would be appropriate to not impose the requirements for 
electronic recordkeeping systems in paragraph (e)(2) of Rule 18a-6, as 
proposed to be amended, on bank SBS Entities, but continue to impose 
them, as proposed to be amended, on nonbank SBS Entities.
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    \47\ See the introductory text to paragraph (e)(2) of Rule 18a-
6, as proposed to be amended (limiting the paragraph's requirements 
to an SBS Entity without a prudential regulator).
    \48\ Unlike Rules 17a-3 and 17a-4 which consolidate broker-
dealer recordkeeping requirements, the recordkeeping requirements 
for banks are diffuse. See, e.g., 31 CFR 1020.410 (recordkeeping 
requirements under the Bank Secrecy Act regarding funds transfers 
equal to or greater than $3,000); 12 CFR 9.8 (recordkeeping 
requirements regarding fiduciary accounts); 12 CFR 12.3 
(recordkeeping requirements for securities transactions); 12 CFR 
25.42 (recordkeeping requirements for small business and farm loans, 
including requirement to maintain the information in machine 
readable form).
    \49\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 
68552.
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    Paragraph (f)(2)(ii)(A) of Rule 17a-4 sets forth the WORM 
requirement. The Commission is proposing to amend Rule 17a-4(f) to add 
an audit-trail alternative to the WORM requirement for broker-
dealers.\50\ In addition, the Commission is proposing to amend Rule 
18a-6(e) to require that the electronic recordkeeping systems of 
nonbank SBS Entities must meet either the audit-trail requirement or 
the WORM requirement.\51\ Unlike bank SBS Entities, the Commission is 
responsible for promulgating capital and margin requirements for 
nonbank SBS Entities and overseeing their compliance with those 
requirements.\52\ Given this broader regulatory responsibility over 
nonbank SBS Entities, the Commission preliminarily believes it would be 
appropriate to amend the existing requirements for electronic 
recordkeeping systems in Rule 18a-6(e) to add the requirement that the 
systems must meet either the audit-trail or WORM requirement. As 
discussed below, a WORM-compliant electronic recordkeeping system may 
be preferable for certain types of records. Moreover, including this 
alternative in the proposed amendments to Rule 18a-6(e) would provide 
nonbank SBS Entities the same two alternatives that broker-dealers 
would have under the proposed amendments to Rule 17a-4(f).
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    \50\ See paragraph (f)(2)(i)(A) of Rule 17a-4, as proposed to be 
amended. As discussed above, the existing WORM requirement of Rule 
17a-4 would be set forth in paragraph (f)(2)(i)(B) of Rule 17a-4, as 
proposed to be amended.
    \51\ See paragraph (e)(2)(i)(B) of Rule 18a-6, as proposed to be 
amended.
    \52\ See 15 U.S.C. 78o-10(e)(1)(B). See also Capital, Margin, 
and Segregation Requirements for Security-Based Swap Dealers and 
Major Security-Based Swap Participants and Capital and Segregation 
Requirements for Broker-Dealers, Exchange Act Release No. 86175 
(Jun. 21, 2019), 84 FR 43872 (Aug. 22, 2019) (``SBSD/MSBSP Capital, 
Margin, and Segregation Adopting Release'') (Commission release 
adopting capital and margin requirements for nonbank SBS Entities).
---------------------------------------------------------------------------

    Under the proposed amendments to Rule 17a-4(f), broker-dealers 
would have an option to employ electronic recordkeeping systems that 
meet the audit-trail requirement as an alternative to the existing WORM 
requirement (which requirement would be retained in the rule). Under 
the proposed amendments to Rule 18a-6(e), nonbank SBS Entities would 
need to employ electronic recordkeeping systems that meet either the 
proposed audit-trail requirement or the proposed WORM requirement. 
Broker-dealers and nonbank SBS Entities would have the flexibility to 
preserve all of their electronic records either by (1) consistently 
using an electronic recordkeeping system that meets either the audit-
trail requirement or the WORM requirement or (2) preserving some 
electronic records using an electronic recordkeeping system that meets 
the audit-trail requirement and preserving other electronic records 
using an electronic recordkeeping system that meets the WORM 
requirement.\53\ In the case of both rules, the object of the proposal 
is to require broker-dealers and nonbank SBS Entities to preserve 
electronic records in a manner that permits original records to be re-
created if altered, over-written, or erased, or that prevents original 
records from being altered, over-written, or erased. The objective is 
to require these registrants to maintain and preserve electronic 
records in a manner that protects the authenticity and reliability of 
original records.
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    \53\ As discussed in more detail below, broker-dealers and 
nonbank SBS Entities could for business reasons elect to use two 
recordkeeping systems if the proposals are adopted: One that 
complies with the audit-trail requirement and one that complies with 
the WORM requirement.
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    The audit-trail alternative would be designed to address concerns 
that the WORM requirement causes some firms to deploy an electronic 
recordkeeping system that serves no purpose other than to hold records 
in a manner that meets the Commission's regulatory requirements for 
electronic recordkeeping systems.\54\ In particular, following the 
publication of the Rule 17a-4(f) Interpretation, third-party vendors 
developed software-based solutions designed to meet the WORM 
requirement of Rule 17a-4(f). Some broker-dealers use these electronic 
storage solutions to meet the WORM requirement. However, the records 
stored on these electronic recordkeeping systems are often retained in 
that particular format solely for the purpose of meeting the WORM 
requirement (i.e., they are not the records and associated electronic 
recordkeeping systems the firms use for business purposes). Broker-
dealers have explained to Commission staff that the electronic 
recordkeeping systems used for business purposes are dynamic and 
updated constantly (e.g., with each new transaction or position) and 
easily accessible for retrieving records; whereas the WORM-compliant 
electronic recordkeeping systems are more akin to static ``snapshots'' 
of the records at a point in time and less accessible.\55\ As a result, 
some broker-dealers currently use WORM-compliant electronic 
recordkeeping systems solely to meet the requirements of Rule 17a-4(f). 
Broker-dealers retrieve records from their business-based electronic 
recordkeeping systems for their own purposes. In addition, the 
Commission understands that firms generally retrieve and produce 
records from their business-based electronic recordkeeping systems 
rather than from their WORM-compliant electronic recordkeeping systems 
in response to requests from securities regulators because these 
records are easier to retrieve. Commission staff typically do not 
specifically request that records be produced from the WORM-compliant

[[Page 68306]]

recordkeeping system.\56\ The exception would be a case where 
alteration is suspected. In that case, the staff would request records 
from the WORM-compliant electronic recordkeeping system.
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    \54\ See Rule 17a-4(f) Rulemaking Petition at 4 (``Today, WORM 
systems are costly, outmoded, and inefficient storage containers 
used exclusively to meet the rule's requirements.'').
    \55\ See Rule 17a-4(f) Rulemaking Petition at 4 (``Data stored 
in WORM is essentially a static snapshot of a record that is locked 
and secured from any manipulation or deletion, as opposed to a 
complete system that could be used to stand up a production system 
during or following a disaster event.'').
    \56\ See also Rule 17a-4(f) Rulemaking Petition at 5 (``[O]ur 
members report that regulators (including SEC and FINRA examiners 
and enforcement staff) do not typically ask for production of 
records from WORM storage because the information or data is not 
readily sortable or searchable. Regulators instead request 
customized extracts or views of data collected from active storage 
systems where the record was originally created, that has not yet 
been transferred to a WORM system.'').
---------------------------------------------------------------------------

    For these reasons, the Commission is proposing to amend Rule 17a-
4(f) to provide an audit-trail alternative to the WORM requirement. In 
addition, the Commission is proposing to require nonbank SBS Entities 
to use electronic recordkeeping systems that meet either the audit-
trail or WORM requirement. Under the audit-trail alternative, the 
electronic recordkeeping system would need to preserve the records for 
the duration of their applicable retention periods in a manner that 
maintains a complete time-stamped audit trail that includes: (1) All 
modifications to and deletions of a record or any part thereof; (2) the 
date and time of operator entries and actions that create, modify, or 
delete the record; (3) the individual(s) creating, modifying, or 
deleting the record; and (4) any other information needed to maintain 
an audit trail of each distinct record in a way that maintains 
security, signatures, and data to ensure the authenticity and 
reliability of the record and will permit re-creation of the original 
record and interim iterations of the record.\57\ The objective of the 
proposed audit-trail alternative is to require the electronic 
recordkeeping system to be configured so that an original record that 
is altered, over-written, or erased can be re-created for the retention 
period applicable to the original record. This would be an alternative 
to the WORM requirement, which prevents an original record from being 
altered, over-written, or erased for its required retention period.
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    \57\ See, e.g., 21 CFR 11.10 (regulation of the U.S. Food and 
Drug Administration setting forth requirements for persons who used 
closed systems to create, modify, maintain, or transmit electronic 
records and requiring, among other things, the use of time-stamped 
audit trails to independently record the date and time of operator 
entries and actions that create, modify, or delete electronic 
records and that record changes shall not obscure previously 
recorded information).
---------------------------------------------------------------------------

    It is the Commission's understanding that electronic recordkeeping 
systems used by certain broker-dealers and nonbank SBS Entities for 
business purposes can be configured to meet the audit-trail 
requirement. Therefore, this amendment along with the others proposed 
in the release are designed to facilitate the use of a single 
electronic recordkeeping system for business and regulatory purposes.
    Under the proposed amendments, broker-dealers could potentially 
continue to use the electronic recordkeeping systems they currently 
employ to meet the WORM requirement. Similarly, nonbank SBS Entities 
would have the option to use electronic recordkeeping systems that meet 
the WORM requirement (as an alternative to the audit-trail 
requirement).\58\ For example, WORM-compliant electronic recordkeeping 
systems may be appropriate for storing certain types of records such as 
emails (as compared to transaction and ledger account data that is 
updated continuously).\59\ Moreover, some broker-dealers may choose to 
use their existing WORM-compliant electronic recordkeeping systems 
rather than adopt a new technology. Further, some broker-dealers may 
choose to retain existing electronic records on a legacy WORM-compliant 
electronic recordkeeping system, including software-based systems that 
are designed to follow the Rule 17a-4(f) Interpretation rather than 
transfer them to an electronic recordkeeping system that would meet the 
proposed audit-trail requirement. However, these firms could decide to 
preserve new records on an electronic recordkeeping system that would 
meet the proposed audit-trail requirement.
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    \58\ The Commission would interpret the WORM requirement as set 
forth in the text of paragraph (e)(2)(i)(B) of Rule 18a-6, as 
proposed to be amended, consistently with how the WORM requirement 
as set forth in the text of paragraph (f)(2)(ii)(A) of Rule 17a-4 
was interpreted by the Commission in 2019 and 2003. See SBSD/MSBSP 
Recordkeeping Adopting Release, 84 FR at 68568; Rule 17a-4(f) 
Interpretation, 68 FR 25281.
    \59\ See Rule 17a-4(f) Rulemaking Petition at 4 (``Although 
storing electronic communications data--like email and instant 
messaging, or common unstructured file types such as PDF--in WORM 
format has become standardized, dynamic content generated by complex 
trading and risk systems, emerging communications platforms, as well 
as records created by aggregating information from various systems, 
cannot be easily stored in WORM format.'').
---------------------------------------------------------------------------

    Paragraph (f)(2)(ii)(B) of Rule 17a-4 requires electronic storage 
media used by a broker-dealer to verify automatically the quality and 
accuracy of the storage media recording process. Similarly, paragraph 
(e)(2)(i) of Rule 18a-6 requires an electronic storage system used by 
an SBS Entity to verify automatically the quality and accuracy of the 
electronic storage system recording process. The Commission is 
proposing to amend the requirements set forth in these two paragraphs. 
The amendments would require that the electronic recordkeeping system 
used by a broker-dealer or nonbank SBS Entity must verify automatically 
the completeness and accuracy of the processes for storing and 
retaining records electronically.\60\ The proposed new text is intended 
to specify that the requirement is designed to ensure that when an 
original record is added to the electronic recordkeeping system it is 
completely and accurately captured in the system.\61\
---------------------------------------------------------------------------

    \60\ See paragraph (f)(2)(ii) of Rule 17a-4 and paragraph 
(e)(2)(ii) of Rule 18a-6, as proposed to be amended.
    \61\ In this regard, the proposed text would replace the text in 
Rules 17a-4(f) and 18a-6(e) that reads ``Verify automatically the 
quality and accuracy of the electronic storage system recording 
process'' with the phrase ``Verify automatically the completeness 
and accuracy of the processes for storing and retaining records 
electronically.'' See paragraph (f)(2)(ii) of Rule 17a-4 and 
paragraph (e)(2)(ii) of Rule 18a-6, as proposed to be amended.
---------------------------------------------------------------------------

    Paragraph (f)(2)(ii)(C) of Rule 17a-4 requires electronic storage 
media used by a broker-dealer to serialize the original and, if 
applicable, duplicate units of storage media, and time-date for the 
required period of retention the information placed on such electronic 
storage media. Paragraph (e)(2)(ii) of Rule 18a-6 requires an 
electronic storage system used by an SBS Entity, if applicable, to 
serialize the original and duplicate units of the storage media, and 
time-date for the required period of retention the information placed 
in such electronic storage system. Consequently, Rule 18a-6(e) imposes 
the requirement on an SBS Entity only if serializing and time-dating 
storage media is applicable. The Commission explained this difference 
between Rule 17a-4(f) and Rule 18a-6(e) by stating that serialization 
and time-dating is required when a firm uses optical disks to meet the 
WORM requirement.\62\ As discussed above, the Commission is proposing 
amendments to Rules 17a-4(f) and 18a-6(e) that would provide firms with 
the option of using electronic recordkeeping systems that meet either 
the audit-trail requirement or the WORM requirement. Moreover, as 
discussed above, the Rule 17a-4(f) Interpretation, which is extant, 
clarifies that Rule 17a-4(f) does not mandate the use of optical disk 
to meet the WORM requirement.\63\ Under the proposed amendments to 
Rules 17a-4(f)

[[Page 68307]]

and 18a-6(e), the serialization and time-stamping requirements would 
apply only if the firm uses optical disks as the storage media to meet 
the WORM requirement. For this reason, the Commission is proposing to 
amend Rule 17a-4(f) to provide that the requirement is triggered if 
applicable.\64\
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    \62\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 
68568.
    \63\ See Rule 17a-4(f) Interpretation. The Commission would 
interpret the rule text in Rule 18a-6(e), as proposed to be amended, 
consistently with the Rule 17a-4(f) Interpretation of the WORM 
requirement and the 2019 interpretation of the WORM requirement. See 
Rule 17a-4(f) Interpretation, 68 FR 25281; SBSD/MSBSP Recordkeeping 
Adopting Release, 84 FR at 68568.
    \64\ See paragraph (f)(2)(iii) of Rule 17a-4 (f) as proposed to 
be amended. The Commission is proposing amendments to the 
serialization and time-stamping requirement of paragraph (e)(2) of 
Rule 18a-6 to further clarify that it is tied to the use of optical 
disks to meet the WORM requirement. In particular, the phrase 
``placed in such electronic storage system'' would be replaced with 
the phrase ``placed on such electronic storage media.'' See 
paragraph (e)(2)(iii) of Rule 18a-6, as proposed to be amended.
---------------------------------------------------------------------------

    Paragraph (f)(2)(ii)(D) of Rule 17a-4 requires electronic storage 
media used by a broker-dealer to have the capacity to readily download 
indexes and records preserved on the electronic storage media to any 
medium acceptable under Rule 17a-4 as required by the Commission or the 
self-regulatory organizations (``SROs'') of which the broker-dealer is 
a member. Paragraph (e)(2)(iii) of Rule 18a-6 requires an electronic 
storage system used by an SBS Entity to have the capacity to readily 
download into a readable format indexes and records preserved in the 
electronic storage system. Indexes organize records and are a means for 
locating specific records within a recordkeeping system. However, 
electronic recordkeeping systems may use other means to organize and 
locate records.
    The Commission is proposing to amend the text of these two 
requirements to incorporate the information that would be stored under 
the proposed audit-trail requirement and to specify that the electronic 
recordkeeping system must have the capacity to readily download and 
transfer copies of a record and its audit trail (if applicable) in both 
a human readable format and in a reasonably usable electronic 
format.\65\ A human readable format would be a format that can be 
naturally read by an individual. A reasonably usable electronic format 
would be a format that is common and compatible with commonly used 
systems for accessing and reading electronic records. This proposed 
requirement is designed to address an electronic recordkeeping system 
that stores records in a proprietary file format that cannot be 
accessed or read by commonly used systems. In this case, producing the 
records in their native file format would be meaningless since they 
could not be accessed or read by securities regulators.\66\ Moreover, 
depending on the nature and volume of the requested records, producing 
them in a human readable format may hinder or delay an examination or 
investigation because it would take more time to search the records for 
relevant information; whereas electronic records can be searched and 
sorted using a computer. Conversely, in some cases, it may be more 
efficient to produce a record in a human readable format; for example, 
if an examiner is on site and requests a specific record. For these 
reasons, the proposed amendments would require that the electronic 
recordkeeping system have the capacity to readily download and transfer 
copies of a record and its audit trail (if applicable) in both a human 
readable format and in a reasonably usable electronic format.
---------------------------------------------------------------------------

    \65\ As discussed in section II.G. of this release, the 
Commission also is proposing to amend paragraph (j) of Rule 17a-4 
and paragraph (g) of Rule 18a-6 to require that an electronic record 
be produced in a reasonably usable electronic format.
    \66\ If the native file format used by the firm is compatible 
with commonly used systems for accessing and reading electronic 
records, it could be produced in that format.
---------------------------------------------------------------------------

    Further, rather than refer to the capacity to download indexes, the 
proposed requirements would require the capacity to download and 
transfer information needed to locate specific electronic records. In 
particular, the proposed amendments would require the electronic 
recordkeeping system to have the capacity to readily download and 
transfer copies of a record and its audit trail (if applicable) in both 
a human readable format and in a reasonably usable electronic format 
and to download and transfer the information needed to locate the 
electronic record.\67\ The requirement to download and transfer audit 
trails would apply only if the firm's electronic recordkeeping system 
uses the audit-trail alternative. The more general reference to 
``information needed to locate the electronic record'' would be 
designed to incorporate whatever means a particular electronic 
recordkeeping systems uses to organize the records and locate a 
specific record (e.g., indexes or data fields).
---------------------------------------------------------------------------

    \67\ See paragraph (f)(2)(iv) of Rule 17a-4 and paragraph 
(e)(2)(iv) of Rule 18a-6, as proposed to be amended. The current 
text of Rule 17a-4(f) sometimes prescribes requirements that refer 
to the staffs of Commission and SROs of which the broker-dealer is a 
member. See paragraphs (f)(2)(ii)(D), (f)(3)((i), (f)(3)(iv)(A), 
(f)(3)(v)((A), and (f)(3)(vi) of Rule 17a-4. In other cases, the 
current text refers to the staffs of Commission, SROs of which the 
broker-dealer is a member, and state securities regulators having 
jurisdiction over the broker-dealer. See paragraphs (f)(3)(ii) and 
(vii) of Rule 17a-4. The Commission is proposing to consistently 
reference the staffs of the Commission, SROs of which the broker-
dealer is a member, and state securities regulators having 
jurisdiction over the broker-dealer. See paragraphs (f)(2)(iv), 
(f)(3)(i), (f)(3)(ii), (f)(3)(v)(B), (f)(3)(vi), (f)(3)(vii), 
(f)(4)(i), (f)(4)(ii), and (f)(iv)(A) of Rule 17a-4, as proposed to 
be amended. The current text of Rule 18a-6(e) sometimes prescribes 
requirements that refer to the staff of the Commission. See 
paragraphs (e)(3)(i), (e)(3)(iv)(A), (e)(3)(v)(A), and (e)(3)(vi) of 
Rule 18a-6. The rule does not refer to the staffs of SROs of which 
the SBS Entity is a member because SBS Entities will not be members 
of an SRO. However, SBS Entities may be subject to the jurisdiction 
of state securities regulators. Consequently, the Commission is 
proposing to add references to the staffs of state securities 
regulators having jurisdiction over the SBS Entity when there is a 
reference to the staff of the Commission. See paragraphs (e)(2)(iv), 
(e)(3)(i), (e)(3)(ii), (e)(3)(v)(B), (e)(3)(vi), and (e)(3)(vii) of 
Rule 18a-6, as proposed to be amended.
---------------------------------------------------------------------------

E. Requirements for Broker-Dealers and SBS Entities Using Electronic 
Recordkeeping Systems

    Paragraph (f)(3) of Rule 17a-4 and paragraph (e)(3) of Rule 18a-6 
impose obligations on broker-dealers and SBS Entities, respectively, 
related to their use of electronic recordkeeping systems. In general, 
these requirements are designed to ensure that the staffs of the 
Commission and other relevant securities regulators can access and 
examine the records. As discussed below, the Commission is proposing 
amendments to these requirements. Under the proposed amendments, 
prudentially regulated SBS Entities would no longer be subject to the 
requirements of paragraph (e)(2) of Rule 18a-6. Prudentially regulated 
SBS Entities would, however, continue to be subject to the requirements 
of paragraph (e)(3) of the rule. Paragraph (e)(3) of Rule 18a-6 does 
not impose technical requirements on the electronic recordkeeping 
system. Instead, it specifies the requirements for the SBS Entity in 
connection with its use of an electronic recordkeeping system. As noted 
above, these requirements generally are designed to ensure that the 
staffs of the Commission and other relevant regulators can access and 
examine the records. For these reasons, the Commission preliminarily 
believes they should continue to apply to bank SBS Entities.
    The introductory text of paragraph (f)(3) of Rule 17a-4 provides 
that if the broker-dealer uses micrographic media or electronic storage 
media, it must comply with requirements set forth in the paragraph, 
which are discussed below. Similarly, the introductory text of 
paragraph (e)(3) of Rule 18a-6 provides that, if an SBS Entity uses an 
electronic storage system, it must comply with the requirements set 
forth in the paragraph, which are also discussed below. The Commission 
is

[[Page 68308]]

proposing to simplify the introductory text of both paragraphs.\68\
---------------------------------------------------------------------------

    \68\ See introductory text of paragraph (f)(3) of Rule 17a-4 and 
paragraph (e)(3) of Rule 18a-6, as proposed to be amended 
(providing, respectively, that a broker-dealer or SBS Entity ``using 
an electronic recordkeeping system must:''). In addition, the 
introductory text of paragraph (f)(3) of Rule 17a-4, as proposed to 
be amended, would not reference ``micrographic media,'' instead, the 
existing requirements for using micrographic media would be set 
forth in new paragraph (f)(4) of Rule 17a-4.
---------------------------------------------------------------------------

    Paragraph (f)(3)(i) of Rule 17a-4 requires a broker-dealer to at 
all times have available, for examination by Commission or SRO staff, 
facilities for the immediate, easily readable projection or production 
of micrographic media or electronic storage media images and for the 
production of easily readable images. Similarly, paragraph (e)(3)(i) of 
Rule 18a-6 requires an SBS Entity to at all times have available for 
examination by Commission staff facilities for the immediate, easily 
readable projection or production of records or images maintained on an 
electronic storage system and for the production of easily readable 
copies of those records or images.
    The Commission is proposing amendments to paragraph (f)(3)(i) of 
Rule 17a-4 that would delete references to micrographic media and 
replace terms that are tied to micrographic media.\69\ In addition, the 
proposed amendments to paragraphs (f)(3)(i) of Rule 17a-4 and (e)(3)(i) 
of Rule 18a-6 are intended to replace terms that are tied to optical 
disk technology.\70\ The Commission's objective is to set forth new 
requirements that would require broker-dealers and SBS Entities to have 
facilities available to produce records to the staffs of the 
Commission, SROs, and state securities regulators, as applicable, and 
to read records stored on an electronic recordkeeping system.\71\
---------------------------------------------------------------------------

    \69\ While paragraph (f)(3)(i) of Rule 17a-4, as proposed to be 
amended, would no longer reference micrographic media, a broker-
dealer would continue to be able to use micrographic media to 
preserve records under the requirements set forth in new paragraph 
(f)(4) of Rule 17a-4.
    \70\ In particular, the amendments to Rule 17a-4 would replace 
the phrase ``electronic storage media images'' and the term 
``images'' with the term ``record'' and the amendments Rules 17a-4 
and 18a-6 would remove the term ``projection.'' The amendments to 
Rule 18a-6 would remove the term ``images.''
    \71\ See paragraph (f)(3)(i) of Rule 17a-4, as proposed to be 
amended (providing that a broker-dealer must ``[a]t all times have 
available, for examination by the staffs of the Commission, the 
self-regulatory organizations of which the member, broker, or dealer 
is a member, or any State securities regulator having jurisdiction 
over the member, broker or dealer facilities for immediate 
production of records preserved by means of the electronic 
recordkeeping system and for producing copies of those records'') 
and paragraph (e)(3)(i) of Rule 18a-6, as proposed to be amended 
(providing that an SBS Entity must ``[a]t all times have available, 
for examination by the staffs of the Commission or any State 
regulator having jurisdiction over the security-based swap dealer or 
major security-based swap participant, facilities for immediate 
production of records preserved by means of the electronic 
recordkeeping system and for producing copies of those records'').
---------------------------------------------------------------------------

    Paragraph (f)(3)(ii) of Rule 17a-4 requires a broker-dealer to be 
ready at all times to provide, and immediately provide, any facsimile 
enlargement that the staff of the Commission, an SRO, or state 
securities regulator may request. Similarly, paragraph (e)(3)(ii) of 
Rule 18a-6 requires that an SBS Entity be ready at all times to 
immediately provide in a readable format any record or index stored on 
the electronic storage system that the staff of the Commission 
requests.
    The Commission is proposing amendments to both of these paragraphs 
to require the broker-dealer and the SBS Entity to be ready at all 
times to provide records stored on an electronic recordkeeping system. 
In particular, the current text of both paragraphs would be replaced 
with new text requiring the broker-dealer or SBS Entity to be ready at 
all times to provide immediately any record or information needed to 
locate records stored by means of the electronic recordkeeping system 
that the staffs of the Commission, SROs, and state securities 
regulators, as applicable, may request.\72\
---------------------------------------------------------------------------

    \72\ See paragraph (f)(3)(ii) of Rule 17a-4 and paragraph 
(e)(3)(ii) of Rule 18a-6, as proposed to be amended.
---------------------------------------------------------------------------

    Paragraph (f)(3)(iii) of Rule 17a-4 requires a broker-dealer to 
store separately from the original, on any medium acceptable under Rule 
17a-4, a duplicate copy of a record for the requisite time period. 
Similarly, paragraph (e)(3)(iii) of Rule 18a-6 requires that an SBS 
Entity store separately from the original a duplicate copy of a record 
stored on the electronic storage system for the requisite time period. 
These current provisions require broker-dealers and SBS Entities to 
maintain a second copy of each record.
    The Commission is proposing amendments to both of these paragraphs 
to require the broker-dealer and the SBS Entity to have a backup set of 
records when records are preserved on an electronic recordkeeping 
system.\73\ Under the proposal, the broker-dealer or SBS Entity would 
need to have a second electronic recordkeeping system that preserves a 
second set of records that can be accessed and examined if the primary 
electronic recordkeeping system storing the primary set of records is 
disrupted, malfunctions, or otherwise becomes inaccessible. The second 
electronic recordkeeping system would serve as a redundant source from 
which to retrieve records if records cannot be retrieved from the 
primary recordkeeping system. In addition to facilitating examinations, 
the backup electronic recordkeeping system would promote the business 
continuity of the broker-dealer or SBS Entity in the event the primary 
electronic recordkeeping system is disrupted. This would benefit the 
firm and protect investors and other securities market participants. 
The second electronic recordkeeping system would need to meet the 
requirements of Rules 17a-4(f) and 18a-6(e), except that it would not 
need a backup recordkeeping system.\74\ The records stored on the 
backup electronic recordkeeping system would need to be preserved in 
accordance with record preservation requirements of Rules 17a-4 or 18a-
6, as applicable. Among other requirements, this would mean that the 
second set of records would need to be preserved for their required 
retention periods.
---------------------------------------------------------------------------

    \73\ See paragraph (f)(3)(iii) of Rule 17a-4, as proposed to be 
amended (providing that a broker-dealer must ``[m]aintain a backup 
electronic recordkeeping system that meets the other requirements of 
this paragraph (f) and that retains the records required to be 
maintained and preserved pursuant to Sec. Sec.  240.17a-3 and 
240.17a-4 in accordance with this section'') and paragraph 
(e)(3)(iii) of Rule 18a-6, as proposed to be amended (providing that 
an SBS Entity must ``[m]aintain a backup electronic recordkeeping 
system that meets the other requirements of this paragraph (e) and 
that retains the records required to be maintained and preserved 
pursuant to Sec. Sec.  240.18a-5 and 240.18a-6 in accordance with 
this section'').
    \74\ Accordingly, to address this proposed amendment, the text 
of paragraph (f)(3)(iii) of Rule 17a-4, as proposed to be amended, 
and paragraph (e)(3)(iii) of Rule 18a-6, as proposed to be amended, 
refer to the ``other'' requirements of Rules 17a-4(f) and 18a-6(e), 
respectively.
---------------------------------------------------------------------------

    Paragraph (f)(3)(iv) of Rule 17a-4 requires a broker-dealer to 
organize and index accurately all information maintained on both 
original and any duplicate storage media. Paragraph (f)(3)(iv)(A) 
requires a broker-dealer to have the indexes available at all times for 
examination by the staffs of the Commission or an SRO. Paragraph 
(f)(3)(iv)(B) requires that each index be duplicated and the duplicate 
copies be stored separately from the original copy of the index. 
Finally, paragraph (f)(3)(iv)(C) requires that the original and 
duplicate indexes be preserved for the time required for the indexed 
record. Similarly, paragraph (e)(3)(iv) of Rule 18a-6 requires an SBS 
Entity to organize and index accurately all information maintained on 
both original and any duplicate storage system. Paragraph (e)(3)(iv)(A) 
requires an SBS Entity to have the indexes available at

[[Page 68309]]

all times for examination by the staff of the Commission. Paragraph 
(e)(3)(iv)(B) requires that each index be duplicated and the duplicate 
copies be stored separately from the original copy of the index. 
Finally, paragraph (e)(3)(iv)(C) requires that the original and 
duplicate indexes be preserved for the time required for the indexed 
record.
    As discussed above, some electronic recordkeeping systems may use 
means other than indexes to organize and locate records stored on the 
systems. Further, the references to indexes in Rule 17a-4(f), in part, 
reflect the widespread use of optical disks to store records 
electronically when the rule was adopted in 1997. Consequently, the 
Commission is proposing to amend these paragraphs of Rules 17a-4(f) and 
18a-6(e) to impose obligations on broker-dealers and SBS Entities to 
organize and maintain information necessary to locate records stored on 
their electronic recordkeeping systems without mandating the use of 
indexes. Under the amendments, a broker-dealer or SBS Entity using an 
electronic recordkeeping system would need to organize and maintain 
information necessary to locate records maintained by the electronic 
recordkeeping system.\75\
---------------------------------------------------------------------------

    \75\ See paragraph (f)(3)(iv) of Rule 17a-4 and paragraph 
(e)(3)(iv) of Rule 18a-6, as proposed to be amended.
---------------------------------------------------------------------------

    Rule 17a-4(f)(3)(v) requires that the broker-dealer have in place 
an audit system providing for accountability regarding inputting of 
records required to be maintained and preserved pursuant to Rules 17a-3 
and 17a-4 to electronic storage media and inputting of any changes made 
to every original and duplicate record maintained and preserved on 
electronic storage media. Paragraph (f)(3)(v)(A) requires a broker-
dealer to have the results of the audit system available at all times 
for examination by the staffs of the Commission or an SRO. Finally, 
paragraph (f)(3)(v)(B) requires that the results of the audit be 
preserved for the time required for the audited records. Similarly, 
Rule 18a-6(e)(3)(v) requires that the SBS Entity have in place an audit 
system providing for accountability regarding inputting of records 
required to be maintained and preserved pursuant to Rules 18a-5 and 
18a-6 to the electronic storage system and inputting of any changes 
made to every original and duplicate record maintained and preserved on 
the electronic storage system. Paragraph (e)(3)(v)(A) requires an SBS 
Entity to have the results of the audit system available at all times 
for examination by the staff of the Commission. Finally, Paragraph 
(e)(3)(v)(B) requires that the results of the audit be preserved for 
the time required for the audited records.
    The Commission is proposing amendments to these paragraphs of Rules 
17a-4 and 18a-6 that are designed to better clarify the obligations of 
the broker-dealer or SBS Entity. In particular, the current rules 
require an ``audit system'' that provides ``accountability'' regarding 
the inputting of records and changes to records to the electronic 
storage media (in the case of Rule 17a-4) or electronic storage system 
(in the case of Rule 18a-6).\76\ The proposed amendments would 
establish specific elements of information relating to electronic 
records for which the broker-dealer would be required to establish an 
auditable system of controls. In particular, the Commission is 
proposing to replace the existing requirement with a requirement that 
the broker-dealer or SBS Entity have in place an auditable system of 
controls that records, among other things: (1) Each input, alteration, 
or deletion of a record; (2) the names of individuals inputting, 
altering, or deleting a record; and (3) the date and time such 
individuals input, altered, or deleted the record.\77\ As used in the 
proposed text, the phrase ``auditable system of controls'' would mean a 
system of controls that is documented and can be audited by internal or 
external examiners to determine whether the controls are operating as 
would be required by the rule. The objective of these proposed 
requirements is to identify a uniform set of information relating to 
electronic records for which the broker-dealer or SBS Entity would have 
responsibility and that could be used to examine whether the system is 
operating in conformance with the requirements of the proposed rule 
(e.g., if the electronic recordkeeping system is using the audit-trail 
requirement, that it is preserving records in a manner that allows the 
original record to be re-created if overwritten, erased, or otherwise 
altered).
---------------------------------------------------------------------------

    \76\ See paragraph (f)(3)(v) of Rule 17a-4 and paragraph 
(e)(3)(v) of Rule 18a-6.
    \77\ See paragraph (f)(3)(v)(A) of Rule 17a-4 and paragraph 
(e)(3)(v)(A) of Rule 18a-6, as proposed to be amended.
---------------------------------------------------------------------------

    The remaining amendments to these paragraphs would be designed to 
incorporate the concept of a system of controls that tracks this 
information. In this regard, the broker-dealer or SBS Entity would need 
to be able to produce a record of the results of the audit of the 
system of controls for examination by the staffs of the Commission, 
SROs, and state securities regulators, as applicable.\78\ This would 
mean the firm would need to be able to produce a record of: (1) Each 
input, alteration, or deletion of a record; (2) the names of 
individuals inputting, altering, or deleting a record; and (3) the date 
and time such individuals input, altered, or deleted the record. In 
addition, the broker-dealer or SBS Entity would need to preserve the 
record of the results of the audit of the system of controls for the 
retention period required for the associated records.\79\ This would 
mean the firm would need to preserve the information discussed above 
for the required retention period of the record.
---------------------------------------------------------------------------

    \78\ See paragraph (f)(3)(v)(B) of Rule 17a-4 and paragraph 
(e)(3)(v)(B) of Rule 18a-6, as proposed to be amended.
    \79\ See paragraph (f)(3)(v)(C) of Rule 17a-4 and paragraph 
(e)(3)(v)(C) of Rule 18a-6, as proposed to be amended.
---------------------------------------------------------------------------

    Paragraph (f)(3)(vi) of Rule 17a-4 requires a broker-dealer to 
maintain, keep current, and provide promptly upon request by the staffs 
of the Commission or an SRO all information necessary to access records 
and indexes stored on the electronic storage media; or place in escrow 
and keep current a copy of the physical and logical file format of the 
electronic storage media, the field format of all different information 
types written on the electronic storage media and the source code, 
together with the appropriate documentation and information necessary 
to access records and indexes. Similarly, paragraph (e)(3)(vi) of Rule 
18a-6 requires an SBS Entity to maintain, keep current, and provide 
promptly upon request by the staff of the Commission all information 
necessary to access records and indexes stored in the electronic 
storage system; or place in escrow and keep current a copy of the 
physical and logical file format of the electronic storage system, the 
field format of all different information types written on the 
electronic storage system and the source code, together with the 
appropriate documentation and information necessary to access records 
and indexes.
    The Commission is proposing to eliminate the escrow account option 
from these paragraphs for two reasons. First, this option is premised 
upon the use of electronic storage media such as optical disk 
technology. Second, it could pose cybersecurity risk to have this 
information held by a third party in escrow. The Commission is 
proposing to retain the requirement that the broker-dealer or SBS 
Entity maintain, keep current, and provide promptly upon request by the 
Commission, SROs, and state securities regulators, as applicable,

[[Page 68310]]

all information necessary to access and locate records preserved by 
means of the electronic recordkeeping system.\80\
---------------------------------------------------------------------------

    \80\ See paragraph (f)(3)(vi) of Rule 17a-4 and paragraph 
(e)(3)(vi) of Rule 18a-6, as proposed to be amended. For the reasons 
discussed above, the proposed rule text does not refer to indexes.
---------------------------------------------------------------------------

    Paragraph (f)(3)(vii) of Rule 17a-4 provides that, for a broker-
dealer exclusively using electronic storage media for some or all of 
its record preservation, at least one third party, who has access to 
and the ability to download information from the broker-dealer's 
electronic storage media to any acceptable medium under Rule 17a-4, 
must file with the DEA for the broker-dealer certain undertakings. The 
required text of the undertakings are set forth in the rule. They 
require the third party to undertake: (1) To furnish promptly to the 
Commission, the broker-dealer's SRO(s), and state securities regulators 
having jurisdiction over the broker-dealer (collectively, the 
``regulators''), upon reasonable request, such information as is deemed 
necessary by the regulators to download information kept on the broker-
dealer's electronic storage media to any medium acceptable under Rule 
17a-4; and (2) to take reasonable steps to provide access to 
information contained on the broker-dealer's electronic storage media, 
including, as appropriate, arrangements for the downloading of any 
record required to be maintained and preserved by the broker-dealer 
pursuant to Rules 17a-3 and 17a-4 in a format acceptable to the 
regulators. The rule further provides that these arrangements must 
provide specifically that in the event of a failure on the part of a 
broker-dealer to download the record into a readable format and after 
reasonable notice to the broker-dealer, upon being provided with the 
appropriate electronic storage medium, the third party will undertake 
to do so, as the regulators may request.
    The Commission proposed similar requirements for Rule 18a-6(e).\81\ 
When adopting the rule, the Commission noted that commenters stated 
that the requirement ``was outdated in light of the changed 
technological environment'' and that providing a third party access to 
electronic recordkeeping systems and client information ``needlessly 
exposes firms to data leakage and cybersecurity threats.'' \82\ The 
Commission stated that any change to the broker-dealer electronic 
storage provisions should be addressed in a separate regulatory 
initiative where the Commission intends to consider electronic storage 
media issues in a broader context, including with respect to other 
market participants.\83\ For these reasons, the Commission did not 
include these third-party access and undertakings requirements in Rule 
18a-6(e).
---------------------------------------------------------------------------

    \81\ See SBSD/MSBSP Recordkeeping Proposing Release, 79 FR at 
25313.
    \82\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 
68569.
    \83\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes it is appropriate to 
eliminate the third-party access and undertakings requirements for the 
reasons discussed above. The Commission also preliminarily believes 
that the access and undertakings requirements may continue to serve a 
useful purpose. Electronic records may be held in a highly secure 
manner to address cybersecurity risks. For example, the records may be 
encrypted and access to them likely will require passwords and other 
forms of authentication. Therefore, producing them may require the 
cooperation of an individual who has the requisite knowledge to access 
the electronic recordkeeping system and retrieve the records stored on 
it. The access and undertakings requirements would be designed to 
provide a backup method for regulators to access records of a broker-
dealer when the firm is either unable or unwilling to furnish records 
that the Commission and other securities regulators are entitled to 
examine pursuant to the Exchange Act and rules thereunder.\84\ For 
example, there may be situations, such as when a broker-dealer is 
failing and customer assets are at risk, when prompt access to the 
records is critical to protecting investors. In this case, relying on 
access and undertakings requirements may result in the records being 
produced more promptly than relying solely on other remedies for the 
firm's failure to produce the records.\85\
---------------------------------------------------------------------------

    \84\ Paragraph (i) of Rule 17a4 has a similar undertaking 
requirement. See 17 CFR 240.17a-4(i). In particular, it provides, in 
pertinent part, that if the records required to be maintained and 
preserved pursuant to the provisions of Rules 17a-3 and 17a-4 are 
prepared or maintained by a third-party, the third party must file 
with the Commission a written undertaking in form acceptable to the 
Commission, signed by a duly authorized person. Id. The rule further 
provides that the undertaking must include the following provision: 
``[w]ith respect to any books and records maintained or preserved on 
behalf of [BD], the undersigned hereby undertakes to permit 
examination of such books and records at any time or from time to 
time during business hours by representatives or designees of the 
Securities and Exchange Commission, and to promptly furnish to said 
Commission or its designee true, correct, complete and current hard 
copy of any or all or any part of such books and records.'' Id. See 
also Recordkeeping by Brokers and Dealers, Exchange Act Release No. 
13962 (Sept. 15, 1977), 42 FR 47551, 47552 (Sept. 21, 1977) 
(Paragraph (i) of Rule 17a-4 was adopted ``to assure the 
accessibility of broker-dealer records in situations where, for 
example, a service bureau refuses to surrender the records due to 
nonpayment of fees.'').
    \85\ The proposed access and undertakings requirements would not 
require actions that contravene any provision of otherwise 
applicable law or actions beyond reasonable steps.
---------------------------------------------------------------------------

    For these reasons, the Commission is proposing to amend Rule 17a-
4(f) to require at all times that a senior officer of the broker-
dealer, who has independent access to and the ability to provide the 
records, execute the undertakings.\86\ This would mean that

[[Page 68311]]

the broker-dealer must at all times have at least one senior officer 
who has independent access to and the ability to provide the records to 
the regulators, and that officer would need to execute the required 
undertakings. Independent access would mean the senior officer has the 
knowledge, credentials, and information necessary to access and provide 
the records without having to rely on other individuals at the firm. 
Therefore, under the proposed rule, if the senior officer that executed 
the undertaking is unable or will no longer serve in that capacity at 
the firm, a different senior officer would have immediately to execute 
and deliver the undertaking. The objective is to have a senior officer 
at all times who can access and provide the records to the Commission 
and other securities regulators provide the undertaking. The Commission 
preliminarily believes this approach would address cybersecurity and 
trade secret concerns about requiring a third party to fulfill these 
responsibilities and, at the same time, provide the Commission and 
other securities regulators with a means to obtain records if the 
broker-dealer refuses to produce them in the normal course.
---------------------------------------------------------------------------

    \86\ See paragraph (f)(3)(vii) of Rule 17a-4, as proposed to be 
amended. In addition to this amendment and the amendments discussed 
below, the Commission is proposing to amend the text of the access 
and undertakings requirements in the following ways: (1) The 
introductory text of paragraph (f)(3)(vii) would be modified to make 
a senior officer obligated to provide access to the records and the 
undertakings, and to conform to the proposed introductory text to 
paragraph (f)(3) by replacing the phrase ``For every member, broker 
or dealer exclusively using electronic storage media for some or all 
of its record preservation under this section, at least one third 
party (the undersigned), who has access to and the ability to 
download information from the member's, broker's or dealer's 
electronic storage media to any acceptable medium under this 
section, must file with the designated examining authority for the 
member, broker or dealer the following undertakings with respect to 
such records:'' with the phrase ``Have at all times a senior officer 
of the member, broker, or dealer (hereinafter, the ``undersigned''), 
who has independent access to and the ability to provide records 
maintained and preserved on the electronic recordkeeping system, 
file with the designated examining authority for the member, broker 
or dealer the following undertakings with respect to such 
records:''; (2) throughout the text of the undertaking references to 
the member, broker, or dealer would be replaced with bracketed 
references to insert the name of the member, broker, or dealer; (3) 
the first sentence of the undertakings would be modified to conform 
to proposed changes to Rule 17a-4(f) discussed above and below by 
replacing the last phrase in the sentence that reads ``to download 
information kept on the member's, broker's or dealer's electronic 
storage media to any medium acceptable under Sec.  240.17a-4'' with 
the phrase ``and to download copies of a record and its audit trail 
(if applicable) preserved by means of an electronic recordkeeping 
system of [Name of the Member, Broker, or Dealer] into both a human 
readable format and a reasonably usable electronic format in the 
event of a failure on the part of [Name of the Member, Broker, or 
Dealer] to download a requested record or its audit trail (if 
applicable);'' (4) the second sentence of the undertakings would be 
modified to conform to proposed changes to Rule 17a-4(f) discussed 
above by replacing the first phrase of the sentence that reads 
``Furthermore, the undersigned hereby undertakes to take reasonable 
steps to provide access to information contained on the member's, 
broker's or dealer's electronic storage media, including, as 
appropriate, arrangements for the downloading of any record'' with 
the phrase ``Furthermore, the undersigned hereby undertakes to take 
reasonable steps to provide access to the information preserved by 
means of an electronic recordkeeping system of [Name of the Member, 
Broker, or Dealer], including, as appropriate, downloading any 
record;'' and (5) the third sentence of the undertakings would be 
modified to conform to proposed changes to Rule 17a-4(f) discussed 
above by replacing it with the following sentence ``Specifically, 
the undersigned will take reasonable steps that, in the event of a 
failure on the part of [Name of the Member, Broker, or Dealer] to 
download the record into a human readable format or a reasonably 
usable electronic format and after reasonable notice to [Name of the 
Member, Broker, or Dealer], the undersigned will download the record 
into a human readable format or a reasonably usable electronic 
format at the request of the staff of the staffs of the Commission, 
any self-regulatory organization of which [Name of the Member, 
Broker, or Dealer] is a member, or any State securities regulator 
having jurisdiction over [Name of the Member, Broker, or Dealer].''
---------------------------------------------------------------------------

    In this regard, the Commission is proposing to modify the first 
undertaking so that it is triggered if the broker-dealer fails to 
provide records and, if applicable, associated audit trails stored on 
the electronic recordkeeping system. As proposed, the senior officer 
would need to undertake to furnish promptly to the regulators, upon 
reasonable request, such information as is deemed necessary by the 
regulators, to download copies of a record and its audit trail (if 
applicable) kept by means of an electronic recordkeeping system by the 
broker-dealer into both a human readable format and a reasonably usable 
electronic format in the event of a failure on the part of the broker-
dealer to download a requested record or its audit trail (if 
applicable). This modification would be intended to limit the senior 
officer's obligations to circumstances where employees or other 
officers of the broker-dealer are either unwilling or unable to access 
and download a requested record or its audit trail, when applicable. In 
the normal course, the Commission expects broker-dealers would produce 
the records to the regulators without the need of the senior's 
officer's intervention.
    The proposed amendments to Rule 18a-6(e) would similarly require a 
senior officer of the SBS Entity, who has independent access to and the 
ability to provide the records, to execute undertakings consistent with 
the undertakings that would be required pursuant to Rule 17a-4(f), as 
proposed to be amended.\87\ However, the undertakings would need to be 
filed with the Commission (rather than a DEA) because SBS Entities do 
not have a DEA.
---------------------------------------------------------------------------

    \87\ See paragraph (e)(3)(vii) of Rule 18a-6, as proposed to be 
amended.
---------------------------------------------------------------------------

F. Requirements for Broker-Dealers Using Micrographic Media To Preserve 
Records

    As discussed above, the Commission believes most broker-dealers do 
not use micrographic media to preserve their records. However, because 
some broker-dealers may use this technology, the proposed amendments to 
Rule 17a-4(f) would preserve this recordkeeping option for broker-
dealers.\88\ The current requirements for broker-dealers using 
micrographic media are set forth in paragraphs (f)(3)(i) through (iv) 
of Rule 17a-4, which also set forth requirements for broker-dealers 
using electronic storage media. As discussed above, paragraph (f)(3) of 
Rule 17a-4 would be amended to set forth requirements solely for 
broker-dealers using electronic recordkeeping systems. Moreover, the 
current provisions of that paragraph would be modified to specifically 
address electronic recordkeeping systems. Consequently, they would not 
address the unique characteristics of micrographic media. For these 
reasons, the Commission is proposing to move the requirements for 
broker-dealers using micrographic media to new paragraph (f)(4) of Rule 
17a-4.
---------------------------------------------------------------------------

    \88\ See paragraph (f)(4) of Rule 17a-4, as proposed to be 
amended.
---------------------------------------------------------------------------

G. Requirement To Produce Electronic Records in a Reasonably Usable 
Electronic Format

    The Commission is also proposing to amend Rule 17a-4(j) to require 
that a broker-dealer must furnish any record and its audit trail (if 
applicable) preserved electronically pursuant to Rule 17a-4(f) in a 
reasonably usable electronic format, if requested by a representative 
of the Commission.\89\ As discussed above, a reasonably usable 
electronic format would be a format that is common and compatible with 
commonly used systems for accessing and reading electronic records. The 
Commission similarly is proposing to amend Rule 18a-6(g) to require SBS 
Entities to furnish any record preserved electronically pursuant to 
Rule 18a-6(e) in a reasonably usable electronic format, if requested by 
a representative of the Commission.\90\
---------------------------------------------------------------------------

    \89\ See paragraph (j) of Rule 17a-4, as proposed to be amended. 
Paragraph (j) of Rule 17a-4 requires, among other things, that a 
broker-dealer promptly furnish to a representative of the Commission 
``legible'' copies of records. Consequently, the rule already 
requires the broker-dealer to produce human readable copies of 
records.
    \90\ Paragraph (g) of Rule 18a-6 requires, among other things, 
that an SBS Entity promptly furnish to a representative of the 
Commission ``legible'' copies of records. Consequently, the rule 
already requires the broker-dealer to produce human readable copies 
of records.
---------------------------------------------------------------------------

III. Request for Comment

    The Commission is requesting comments from all members of the 
public on all aspects of the proposed amendments to Rules 17a-4 and 
18a-6. Commenters are requested to provide empirical data in support of 
any arguments or analyses. With respect to any comments, the Commission 
notes that they are of the greatest assistance to its rulemaking 
initiative if accompanied by supporting data and analysis of the issues 
addressed in those comments and by alternatives to the Commission's 
proposals where appropriate.
    In addition to this general request for comment, the Commission is 
requesting comment on the following specific aspects of the proposals:
    1. Is the proposal to replace the term ``electronic storage media'' 
in Rule 17a-4(f) and the term ``electronic storage media'' in Rule 18a-
6(e) with the term ``electronic recordkeeping system'' appropriate? 
\91\ If so, explain why. If not, explain why not. Is there a more 
appropriate term? If so, identify it and explain why it would be more 
appropriate.
---------------------------------------------------------------------------

    \91\ See section II.A. of the release (discussing these proposed 
amendments).
---------------------------------------------------------------------------

    2. Is the definition of ``electronic recordkeeping system'' in 
Rules 17a-4(f) and 18a-6(e), as proposed to be amended, appropriate? 
\92\ If so, explain why. If not, explain why not. Is there a more 
accurate definition? If so, provide it and explain why it would be more 
accurate.
---------------------------------------------------------------------------

    \92\ See section II.B. of the release (discussing these proposed 
amendments).
---------------------------------------------------------------------------

    3. Is there a reason to retain the notification (including the 90-
day notification) and representation requirements with respect to 
employing an electronic recordkeeping system in

[[Page 68312]]

Rule 17a-4(f)? \93\ If so, explain why. If not, explain why not. If the 
requirements should be retained, should analogous requirements be added 
to Rule 18a-6(e)? If so, explain why. If not, explain why not.
---------------------------------------------------------------------------

    \93\ See section II.C. of the release (discussing these proposed 
amendments).
---------------------------------------------------------------------------

    4. Is the proposal to limit the requirements for electronic 
recordkeeping systems (including the audit-trail and WORM requirements) 
in paragraph (e)(2) of Rule 18a-6 to nonbank SBS Entities appropriate? 
\94\ If so, explain why. If not, explain why not. Would these 
requirements conflict with requirements and guidance of the U.S. 
prudential regulators governing the use of electronic recordkeeping 
systems by bank SBS Entities? If so, please identify the requirements 
and guidance of the prudential regulators that would conflict with the 
proposed requirements of paragraph (e)(2) of Rule 18a-6 and explain how 
they would conflict with those proposed requirements. Would it be 
appropriate to apply certain of the requirements of paragraph (e)(2) of 
Rule 18a-6 to bank SBS Entities? For example, would it be appropriate 
to apply the requirements other than the audit-trail and WORM 
requirements? If so, explain why. If not, explain why not.
---------------------------------------------------------------------------

    \94\ See section II.D. of the release (discussing these proposed 
amendments).
---------------------------------------------------------------------------

    5. Would the proposed rule text setting forth the audit-trail 
requirement achieve the Commission's objective of imposing an 
obligation that the electronic recordkeeping system be configured to 
permit the re-creation of an original record if it is altered, over-
written, or erased? \95\ If so, explain why. If not, explain why not 
and suggest alternative rule text that would achieve this objective.
---------------------------------------------------------------------------

    \95\ See section II.D. of the release (discussing these proposed 
amendments).
---------------------------------------------------------------------------

    6. Would the proposed rule text requiring that the electronic 
recordkeeping system verify automatically the quality and accuracy of 
the electronic storage system storage and retention process achieve the 
Commission's objective that the electronic recordkeeping system be 
configured to ensure that when an original record is added to the 
electronic recordkeeping system it is completely and accurately 
captured in the system? \96\ If so, explain why. If not, explain why 
not and suggest alternative rule text that would achieve this 
objective.
---------------------------------------------------------------------------

    \96\ See section II.D. of the release (discussing these proposed 
amendments).
---------------------------------------------------------------------------

    7. Is the proposed rule text requiring that the electronic 
recordkeeping system serialize the original and duplicate units of the 
storage media, and time-date for the required period of retention the 
information placed on such electronic storage media, if applicable, 
appropriate? \97\ If so, explain why. If not, explain why not. Does 
this requirement as it exists today only apply to electronic 
recordkeeping systems that use optical disk technology? If so, explain 
why. If not, identify other electronic recordkeeping systems for which 
serializing original and duplicate units of the storage media, and 
time-dating for the required period of retention the information placed 
on the electronic storage media is appropriate and done under current 
practices.
---------------------------------------------------------------------------

    \97\ See section II.D. of the release (discussing these proposed 
amendments).
---------------------------------------------------------------------------

    8. Is the proposed rule text requiring that the electronic 
recordkeeping system have the capacity to readily download and transfer 
copies of a record and its audit trail (if applicable) in both a human 
readable format and a reasonably usable electronic format appropriate? 
\98\ If so, explain why. If not, explain why not and suggest 
alternative rule text. What types of electronic record formats should 
be considered reasonably usable? Do broker-dealers and SBS Entities use 
unique (i.e., proprietary) electronic formats? If so, can those 
electronic formats be converted into electronic formats that are 
reasonably usable?
---------------------------------------------------------------------------

    \98\ See section II.D. of the release (discussing these proposed 
amendments).
---------------------------------------------------------------------------

    9. Is the proposed rule text requiring that the electronic 
recordkeeping system have the capacity to readily download and transfer 
the information needed to locate the electronic record sufficiently 
clear? \99\ If so, explain why. If not, explain why not. For example, 
what type of information is necessary to locate a specific record 
maintained and preserved on an electronic recordkeeping system? Are 
indexes used? If so, how? Are data fields used? If so, how? Should the 
rule be more specific in identifying the type of information necessary 
to locate a specific record maintained and preserved on an electronic 
recordkeeping system? If so, explain how and suggest alternative rule 
text.
---------------------------------------------------------------------------

    \99\ See section II.D. of the release (discussing these proposed 
amendments).
---------------------------------------------------------------------------

    10. Is the proposed rule text requiring the broker-dealer or SBS 
Entity to at all times have available, for examination by the 
regulators, facilities for immediate production of records preserved by 
means of the electronic recordkeeping system and for producing copies 
of those records appropriate? \100\ If so, explain why. If not, explain 
why not and suggest alternative rule text. What type of facilities 
would be needed to meet this requirement?
---------------------------------------------------------------------------

    \100\ See section II.E. of the release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

    11. Is the proposed rule text requiring the broker-dealer or SBS 
Entity to be ready at all times to provide immediately any record or 
information needed to locate records stored by means of the electronic 
recordkeeping system that the regulators may request appropriate? \101\ 
If so, explain why. If not, explain why not and suggest alternative 
rule text.
---------------------------------------------------------------------------

    \101\ See section II.E. of the release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

    12. Is the proposed rule text requiring the broker-dealer or SBS 
Entity to maintain a backup electronic recordkeeping system appropriate 
and necessary? \102\ If so, explain why. If not, explain why not. For 
example, do broker-dealers maintain a backup electronic recordkeeping 
system with respect to the electronic records they preserve for 
business purposes? Are their other measures that broker-dealers take 
with respect to preserving their business-purpose electronic records 
that are designed to maintain access to the records if the electronic 
recordkeeping systems fails? If so, please identify and describe them 
and suggest how they could be incorporated into a final rule.
---------------------------------------------------------------------------

    \102\ See section II.E. of the release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

    13. Is the proposed rule text requiring the broker-dealer or SBS 
Entity to organize and maintain information necessary to locate records 
maintained by the electronic recordkeeping system appropriate? \103\ If 
so, explain why. If not, explain why not and suggest alternative rule 
text.
---------------------------------------------------------------------------

    \103\ See section II.E. of the release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

    14. Is the proposed rule text requiring a broker-dealer or SBS 
Entity using an electronic recordkeeping system to have in place an 
auditable system of controls that records, among other things: The 
names of persons inputting, altering, or deleting a record; and the 
date and time such persons input, altered, or deleted the record 
appropriate? \104\ For example, is this the type of information that 
could be used to examine whether the system is operating in conformance 
with the requirements of the proposed rule (e.g., if the electronic 
recordkeeping system is adhering to the audit-trail requirement, that 
it is preserving records in a manner that allows the original record to 
be re-created if overwritten, erased, or otherwise altered)? If so, 
explain why. If not, explain why not and suggest alternative rule text. 
For example, is

[[Page 68313]]

there other information that would be necessary to achieve the 
objective of the requirement? If so, please identify it. Should the 
Commission add a requirement for a periodic audit to confirm that the 
auditable system of controls is working as appropriate? If so, should 
the required audit be internal or external?
---------------------------------------------------------------------------

    \104\ See section II.E. of the release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

    15. Is the proposal to eliminate the requirement that a broker-
dealer engage a third party with access to the firm's electronic 
records who undertakes to provide them to the Commission and other 
securities regulators appropriate? \105\ If so, explain why. If not, 
explain why not. Further, is the proposal to modify this requirement so 
that a senior officer of the broker-dealer must have access to the 
records and undertake to provide them to the Commission appropriate? If 
so, explain why. If not, explain why not. Should the Commission require 
that a second senior officer at all times have independent access to 
and the ability to provide the records and to execute the undertakings? 
If so, explain why. If not, explain why not. For example, would this 
increase insider cybersecurity risk compared to the proposed approach? 
Would switching from a third party to a senior officer reduce 
cybersecurity risk compared with the current third-party requirement? 
If so, explain why. If not, explain why not. Would switching to a 
senior officer provide the Commission and other securities regulators 
with adequate means to obtain records if the broker-dealer refuses to 
produce them in the normal course? If so, please explain. If not, 
explain why not.
---------------------------------------------------------------------------

    \105\ See section II.E. of the release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

    16. What type of senior officer could fulfill the proposed access 
and undertakings requirements? For example, which senior officers have 
access to electronic recordkeeping systems? Are there any circumstances 
in which the senior officer would not be an associated person? Should 
the Commission specify which officers or officers with specific 
responsibilities and reporting lines that would be appropriate to 
provide the senior officer undertakings? If so, please identify them 
and explain why it would be appropriate for them to provide the 
undertakings.
    17. Is the proposal to eliminate the option to place in escrow and 
keep current a copy of the physical and logical file format of the 
electronic storage media, the field format of all different information 
types written on the electronic storage media, and the source code, 
together with the appropriate documentation and information necessary 
to access records and indexes, appropriate? If not, explain why. For 
example, do broker-dealers use this option?
    18. Do broker-dealers or SBS Entities use micrographic media to 
store regulatory records? If not, should the Commission delete the 
option to use micrographic media in Rule 17a-4(f)? \106\ If so, should 
the Commission add an option to use micrographic media to Rule 18a-
6(e)? Are the current requirements in Rule 17a-4(f) for broker-dealers 
using micrographic media consistent with this technology as it exists 
today? If so, explain why. If not, explain why not. Should the current 
requirements be updated? If so, explain how.
---------------------------------------------------------------------------

    \106\ See section II.F. of the release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

    19. Should the Commission adopt a sunset provision after which time 
broker-dealers would no longer be able to use micrographic media? If 
so, explain why or why not. If not, please describe broker-dealers' 
continued use of micrographic media to store records. Would any broker-
dealers incur costs in moving from micrographic media to paper or 
electronic storage media? If so, identify and explain the costs. 
Moreover, do broker-dealers continue to preserve records using paper, 
rather than electronic storage methods, to fulfill the record 
preservation requirements of Rule 17a-4? If so, please provide data as 
to the frequency of such use.
    20. Are the proposed amendments to paragraphs (j) and (g) of Rules 
17a-4 and 18a-6, respectively, that would require firms to furnish a 
record and its audit trail (if applicable) preserved on an electronic 
recordkeeping system pursuant to paragraph (e) of this section in a 
reasonably usable electronic format, if requested by a representative 
of the Commission, appropriate? \107\ If not, explain why.
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    \107\ See section II.G. of the release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

IV. Economic Analysis

    The Commission is mindful of the economic effects, including the 
costs and benefits, of the proposed amendments. Section 3(f) of the 
Exchange Act provides that whenever the Commission is engaged in 
rulemaking pursuant to the Exchange Act and is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, the Commission shall also consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation.\108\ In addition, Section 23(a)(2) 
of the Exchange Act requires the Commission, when making rules under 
the Exchange Act, to consider the impact such rules would have on 
competition.\109\ Exchange Act Section 23(a)(2) also provides that the 
Commission shall not adopt any rule which would impose a burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Exchange Act.
---------------------------------------------------------------------------

    \108\ See 15 U.S.C. 78c(f).
    \109\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The analysis below addresses the likely economic effects of the 
proposed amendments, including the anticipated and estimated benefits 
and costs of the amendments and their likely effects on efficiency, 
competition, and capital formation. The Commission also discusses the 
potential economic effects of certain alternatives to the approaches 
taken in this proposal. Many of the benefits and costs discussed below 
are difficult to quantify. For example, the Commission cannot quantify 
the number of entities that may already have electronic recordkeeping 
systems compliant with the proposed requirements; the extent to which 
some broker-dealers and SBS Entities may need to upgrade existing 
electronic recordkeeping systems to meet the proposed audit-trail 
requirement and costs thereof; or the degree to which broker-dealers 
and SBS Entities may currently pass along recordkeeping costs to 
customers and counterparties. While the Commission has attempted to 
quantify economic effects where possible, much of the discussion of 
economic effects is qualitative in nature.

A. Baseline

    To assess the economic effects of the proposed amendments, the 
Commission is using as the baseline the broker-dealer and security-
based swap markets as they exist at the time of this release, including 
applicable rules the Commission has already adopted, but excluding 
rules the Commission has proposed but not yet finalized.
    With respect to broker-dealers, the regulatory baseline includes 
Rules 17a-4(f) and (j). In addition, as discussed above, the Commission 
has also issued interpretations of Rule 17a-4(f) for broker-
dealers.\110\ With respect to SBS

[[Page 68314]]

Entities, the regulatory baseline includes the statutory provisions 
pursuant to the Dodd-Frank Act and rules adopted by the Commission, 
compliance with which is required. This includes rules adopted by the 
Commission in the following adopting releases: The intermediary 
definitions release; \111\ cross-border release; \112\ security-based 
swap entity registration release; \113\ U.S. activity release; \114\ 
business conduct release; \115\ trade acknowledgment release; \116\ 
capital, margin, and segregation release; \117\ and the recordkeeping 
and reporting release adopting Rules 18a-6(e) and (g).\118\
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    \110\ See Section II.D discussing Rule 17a-4(f) Interpretation. 
See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68568. As 
discussed above, the Commission would interpret the WORM requirement 
as set forth in the text of paragraph (e)(2)(i)(B) of Rule 18a-6, as 
proposed to be amended, consistently with how the WORM requirement 
as set forth in the text of paragraph (f)(2)(ii)(A) of Rule 17a-4 
was interpreted by the Commission in 2019 and 2003.
    \111\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,'' 
Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 
2012).
    \112\ See Application of ``Security-Based Swap Dealer'' and 
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, Exchange Act Release No. 
72372 (June 25, 2014, 79 FR 47278, 47359 (Aug. 12, 2014).
    \113\ See Registration Process for Security-Based Swap Dealers 
and Major Security-Based Swap Participants, Exchange Act Release No. 
75611 (Aug. 5, 2015), 80 FR 48964, 48989 (Aug. 14, 2015).
    \114\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or 
Executed by Personnel Located in a U.S. Branch or Office of an 
Agent; Security-Based Swap Dealer De Minimis Exception, Exchange Act 
Release No. 77104 (Feb. 10, 2016), 81 FR 8598 (Feb. 19, 2016).
    \115\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, Exchange Act 
Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 30081 (May 13, 
2019).
    \116\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, Exchange Act Release No. 78011 (June 8, 
2016), 81 FR 39808, 30143-44 (June 17, 2016).
    \117\ See SBSD/MSBSP Capital, Margin, and Segregation Adopting 
Release, 84 FR 43872.
    \118\ See SBSD/MSBSP Recordkeeping Proposing Release, 84 FR 
68550.
---------------------------------------------------------------------------

    The following sections discuss available data about the security-
based swap market, affected SBS Entities, dual registrants, other 
security-based swap market participants, participant domiciles, and 
broker dealer activity.
1. Broker-Dealers
    The market for broker-dealer services encompasses a relatively 
small set of large and medium sized broker-dealers and thousands of 
smaller broker-dealers competing for niche or regional segments of the 
market.\119\ The market for broker-dealer services includes many 
different markets for a variety of services related to the securities 
business, including (1) managing orders for customers and routing them 
to various trading venues; (2) providing advice to customers that is in 
connection with and reasonably related to their primary business of 
effecting securities transactions; (3) holding customers' funds and 
securities; (4) handling clearance and settlement of trades; (5) 
intermediating between customers and carrying/clearing brokers; (6) 
dealing in corporate debt and equities, government bonds, and municipal 
bonds, among other securities; (7) privately placing securities; and 
(8) effecting transactions in mutual funds that involve transferring 
funds directly to the issuer. Some broker-dealers may specialize in 
just one narrowly defined service, while others may provide a wide 
variety of services.
---------------------------------------------------------------------------

    \119\ See Regulation Best Interest Adopting Release, 84 FR at 
33406. For simplification, the Commission presents this analysis as 
if the market for broker-dealer services encompasses one broad 
market with multiple segments, even though, in terms of competition, 
it could also be discussed in terms of numerous interrelated 
markets.
---------------------------------------------------------------------------

    Based on an analysis of FOCUS filings as of December 2020, there 
were approximately 3,551 registered broker-dealers with over 186 
million customer accounts.\120\ In total, these broker-dealers have 
over $5 trillion in total assets as reported on Form X-17A-5.\121\ More 
than two-thirds of all broker-dealer assets and more than one-third of 
all customer accounts are held by the 19 largest broker-dealers, as 
shown in Table 1.\122\ Of the broker-dealers registered with the 
Commission as of December 2020, 502 broker-dealers were dually 
registered as investment advisers.\123\
---------------------------------------------------------------------------

    \120\ The data is obtained from FOCUS filings as of December 
2020. There may be a double-counting of customer accounts among, in 
particular, the larger broker-dealers as they may report introducing 
broker-dealer accounts as well in their role as clearing broker-
dealers. Customer Accounts includes both broker-dealer and 
investment adviser accounts for dual-registrants.
    \121\ Assets are estimated by Total Assets (allowable and non-
allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II 
and Part IIA, available at https://www.sec.gov/files/formx-17a-5_2.pdf) and correspond to balance sheet total assets for the 
broker-dealer. The Commission does not have an estimate of the total 
amount of customer assets for broker-dealers because that 
information is not included in FOCUS filings. The Commission 
estimates broker-dealer size from the total balance sheet assets as 
described above.
    \122\ Approximately $4.97 trillion of total assets of broker-
dealers (98.7%) are at broker-dealers with total assets in excess of 
$1 billion.
    \123\ This estimate includes the number of broker-dealers who 
are also registered as state investment advisers.

                             Table 1--Registered Broker-Dealers as of December 2020
----------------------------------------------------------------------------------------------------------------
                                                                     Number of                      Cumulative
                                                   Total number       dually        Cumulative       number of
      Size of broker-dealer (total assets)            of BDs      registered BDs   total assets      customer
                                                                         *            ($ bln)        accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................              19              10           3,450      67,178,360
$1 billion to $50 billion.......................             122              24           1,519     107,003,611
$500 million to $1 billion......................              25               5              17         639,425
$100 million to $500 million....................             129              31              27         932,529
$10 million to $100 million.....................             507              98              18       9,771,667
$1 million to $10 million.......................           1,047             194             3.7         383,646
<$1 million.....................................           1,702             140             0.5          13,481
                                                 ---------------------------------------------------------------
    Total.......................................           3,551             502           5,036     185,922,719
----------------------------------------------------------------------------------------------------------------
* For purposes of this table, a dually registered broker-dealer is registered with either the Commission or a
  state as an investment adviser and a broker-dealer.

    The Commission preliminarily estimates that 45 broker-dealers may 
be dually registered with the CFTC as futures commission merchants as 
of December 31, 2020.\124\
---------------------------------------------------------------------------

    \124\ Using FOCUS Report data as of December 31, 2020, there are 
45 broker-dealers that report commodity futures account activity in 
``Part II: Customer's Regulated Commodity Futures Accounts.''
---------------------------------------------------------------------------

    In addition to the above estimates of affected broker-dealers, 
over-the-counter (``OTC'') derivatives dealers will also be

[[Page 68315]]

affected by the proposed recordkeeping amendments. The Commission 
estimates that 5 registered OTC derivatives dealers will be impacted by 
the proposed amendments to Rule 17a-4.
2. Security-Based Swap Markets: Activity and Participants
i. Available Data From the Security-Based Swap Market
    The Commission's understanding of the market is informed, in part, 
by available data on security-based swap transactions, though the 
Commission acknowledges that limitations in the data limit the extent 
to which it is possible to quantitatively characterize the market.\125\ 
Since this data does not cover the entire market, the Commission has 
analyzed market activity using a sample of transactions that includes 
only certain segments of the market. The Commission believes, however, 
that the data underlying this analysis provides reasonably 
comprehensive information regarding single-name credit default swap 
(``CDS'') transactions and the composition of the participants in the 
single-name CDS market.
---------------------------------------------------------------------------

    \125\ The Commission also relies on qualitative information 
regarding market structure and evolving market practices provided by 
commenters and the knowledge and expertise of Commission staff.
---------------------------------------------------------------------------

    The Commission's analysis of the current state of the security-
based swap market is based on data obtained from the Depositary Trust & 
Clearing Corporation (``DTCC'') Derivatives Repository Limited Trade 
Information Warehouse (``TIW''), especially data regarding the activity 
of market participants in the single-name CDS market during the period 
from 2008 to 2021.\126\ Although the definition of security-based swaps 
is not limited to single-name CDS,\127\ the Commission believes that 
the single-name CDS data is sufficiently representative of the market 
to inform our analysis of the current security-based swap market.
---------------------------------------------------------------------------

    \126\ In prior releases, the Commission has examined data for 
other time periods. For example, in the business conduct standards 
adopting release, the Commission presented an analysis of TIW data 
for November 2006 through December 2014. While the exact numbers of 
various groups of transacting agents and account holders in that 
analysis differ from the figures reported in this section (for a 
longer time period), the Commission does not observe significant 
structural differences in market participation. Compare 81 FR at 
30102 (Tables 1 and 2), with Tables 1 and 2 below.
    \127\ While other repositories may collect data on transactions 
in total return swaps on equity and debt, the Commission does not 
currently have access to such data for these products (or other 
products that are security-based swaps). Additionally, the 
Commission explains below that data related to single-name CDS 
provides reasonably comprehensive information for the purpose of 
this analysis.
---------------------------------------------------------------------------

    According to data published by the Bank for International 
Settlements (``BIS''), the global notional amount outstanding in 
single-name CDS was approximately $3.5 trillion,\128\ in multi-name 
index CDS was approximately $4.5 trillion, and in multi-name, non-index 
CDS was approximately $347 billion.\129\ The total gross market value 
outstanding in single-name CDS was approximately $77 billion, and in 
multi-name CDS instruments was approximately $125 billion.\130\ The 
global notional amount outstanding in equity forwards and swaps as of 
December 2020 was $3.6 trillion, with total gross market value of $321 
billion.\131\
---------------------------------------------------------------------------

    \128\ The global notional amount outstanding represents the 
total face amount used to calculate payments under outstanding 
contracts. The gross market value is the cost of replacing all open 
contracts at current market prices.
    \129\ See BIS, Semi-annual OTC derivatives statistics at 
December 2020, Table D5.2, available at https://stats.bis.org/statx/srs/table/d5.2 (accessed Aug. 18, 2021).
    \130\ See id.
    \131\ These totals include swaps and security-based swaps, as 
well as products that are excluded from the definition of ``swap,'' 
such as certain equity forwards. See OTC, equity-linked derivatives 
statistics, Table D5.1, available at https://stats.bis.org/statx/srs/table/d5.1 (accessed Aug. 18, 2021). For the purposes of this 
analysis, the Commission assumes that multi-name index CDS are not 
narrow-based index CDS and therefore, do not fall within the 
security-based swap definition. See 15 U.S.C. 78c(a)(68)(A); see 
also Further Definition of ``Swap,'' ``Security-Based Swap,'' and 
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap 
Agreement Recordkeeping, 77 FR 48208. The Commission also assumes 
that all instruments reported as equity forwards and swaps are 
security-based swaps, potentially resulting in underestimation of 
the proportion of the security-based swap market represented by 
single-name CDS. Therefore, when measured on the basis of gross 
notional outstanding single-name CDS contracts appear to constitute 
roughly 49% of the security-based swap market. Although the BIS data 
reflects the global OTC derivatives market, and not just the U.S. 
market, the Commission has no reason to believe that these ratios 
differ significantly in the U.S. market.
---------------------------------------------------------------------------

ii. Affected SBS Entities
    Final SBS Entity registration rules have been adopted and 
compliance was required as of November 1, 2021.\132\ As of November 9, 
2021, there are 41 entities registered with the Commission as SBSDs, 
and no entities have registered as MSBSPs.\133\
---------------------------------------------------------------------------

    \132\ See Key Dates for Registration of Security-Based Swap 
Dealers and Major Security-Based Swap Participants, available at: 
https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants.
    \133\ See section V.C. of this release (discussing the number of 
SBS Entities that would be subject to the proposed rules).
---------------------------------------------------------------------------

    Firms that act as dealers play a central role in the security-based 
swap market. Based on an analysis of 2020 single-name CDS data in TIW, 
accounts of dealers intermediated transactions with a gross notional 
amount of approximately $1.99 trillion, with approximately 55 percent 
of the gross notional intermediated by the top five dealer 
accounts.\134\
---------------------------------------------------------------------------

    \134\ The Commission staff analysis of TIW transaction records 
indicates that approximately 99% of single-name CDS price-forming 
transactions in 2020 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------

iii. Other Markets and Dual Registrants
    The numerous financial markets are integrated, often attracting the 
same market participants that trade across corporate bond, swap, and 
security-based swap markets, among others. For example, persons who 
will register as SBS Entities are likely also to be engaged in swap 
activity. In part, this overlap reflects the relationship between 
single-name CDS contracts, which are security-based swaps, and index 
CDS contracts, which may be swaps or security-based swaps. A single-
name CDS contract covers default events for a single reference entity 
or reference security. Index CDS contracts and related products make 
payouts that are contingent on the default of index components and 
allow participants in these instruments to gain exposure to the credit 
risk of the basket of reference entities that comprise the index, which 
is a function of the credit risk of the index components. A default 
event for a reference entity that is an index component will result in 
payoffs on both single-name CDS written on the reference entity and 
index CDS written on indices that contain the reference entity. Because 
of this relationship between the payoffs of single-name CDS and index 
CDS products, prices of these products depend upon one another,\135\ 
creating hedging opportunities across these markets.
---------------------------------------------------------------------------

    \135\ ``Correlation'' typically refers to linear relationships 
between variables; ``dependence'' captures a broader set of 
relationships that may be more appropriate for certain swaps and 
security-based swaps. See, e.g., George Casella & Roger L. Berger, 
Statistical Inference 171 (2nd ed. 2002).
---------------------------------------------------------------------------

    These hedging opportunities mean that participants that are active 
in one market are likely to be active in the other. Commission staff 
analysis of approximately 4,149 TIW accounts that participated in the 
market for single-name CDS in 2020 revealed that approximately 3,096 of 
those accounts, or 75 percent, also participated in the market for 
index CDS. Of the accounts that participated in both markets, data 
regarding transactions in 2020 suggests that, conditional on an account 
transacting in notional volume of index CDS in the top third of 
accounts, the

[[Page 68316]]

probability of the same account landing in the top third of accounts in 
terms of single-name CDS notional volume is approximately 61 percent; 
by contrast, the probability of the same account landing in the bottom 
third of accounts in terms of single-name CDS notional volume is only 
11 percent.
    Of the 25 SBSDs subject to Rule 18a-6(e), 24 are dually registered 
with the CFTC as swap dealers and are therefore subject to CFTC 
requirements for entities registered with the CFTC as swap.\136\ 
Additionally, there are six SBSDs that are already or will be subject 
to Rule 17a-4. Further, of 41 entities registered as SBSDs, 26 have a 
prudential regulator.
---------------------------------------------------------------------------

    \136\ See section VI.F. of this release (discussing the CFTC's 
electronic recordkeeping rules). See also section V.C. of this 
release (discussing the number of SBSDs that would be subject to the 
proposed rules).
---------------------------------------------------------------------------

3. Recordkeeping Practices of Market Participants
    Notwithstanding the Commission's 2003 and 2019 interpretations of 
the WORM requirement (i.e., that it can be met with software solutions) 
described above,\137\ the Commission understands that some affected 
broker-dealers maintain electronic recordkeeping systems used daily for 
business purposes and separate electronic recordkeeping systems used to 
meet the WORM requirement. The Commission does not have data regarding 
the number of affected broker-dealers that maintain separate electronic 
recordkeeping systems for these purposes or data sufficient for the 
Commission to evaluate the likelihood that affected broker-dealers 
maintain separate electronic recordkeeping systems for business 
purposes that do or do not satisfy the WORM requirement. As a result, 
the Commission cannot estimate the frequency with which separate 
electronic recordkeeping systems are maintained for these purposes.
---------------------------------------------------------------------------

    \137\ See sections I.B.1. and II.D. of this release (discussing 
the interpretations and broker-dealers' response to them).
---------------------------------------------------------------------------

    The Commission understands that third-party vendors developed 
software-based solutions designed to meet the WORM requirement of Rule 
17a-4(f).\138\ However, affected broker-dealers do not commonly use 
such record systems for business purposes: Broker-dealers have 
explained to Commission staff that the electronic recordkeeping systems 
used for business purposes are dynamic, updated constantly (e.g., with 
each new transaction or position), and easily accessible for retrieving 
records, whereas WORM databases are more akin to static ``snapshots'' 
of the records at a point in time and are less accessible for business 
purposes. As discussed in more detail above, the Commission 
preliminarily believes that affected broker-dealers generally deploy an 
electronic recordkeeping system that serves no purpose other than to 
hold records in a manner that meets the Commission's regulatory 
requirements for electronic recordkeeping systems.\139\ The Commission 
also believes that some affected SBS Entities currently have systems 
complying with the electronic recordkeeping requirements under Rule 
18a-6 as it presently stands, which does not include a WORM or audit-
trail requirement.\140\
---------------------------------------------------------------------------

    \138\ See, e.g., Global Relay, Global Relay Archive, available 
at: https://www.globalrelay.com/gr-services/archive; Amazon, 
Protecting data with Amazon S3 Object lock, available at: https://aws.amazon.com/blogs/storage/protecting-data-with-amazon-s3-object-lock/; Cohasset Associates, Compliance Assessment: Amazon Web 
Services (AWS) Simple Storage Service (S3), available at: https://d1.awsstatic.com/r2018/b/S3-Object-Lock/Amazon-S3-Compliance-Assessment.pdf; Microsoft, Securities and Exchange Commission (SEC) 
Rule 17a-4(f) United States, available at: https://docs.microsoft.com/en-us/compliance/regulatory/offering-sec-17a-4.
    \139\ See section II.D of this release (discussing broker-
dealers' use of WORM compliant electronic recordkeeping systems).
    \140\ As noted above in section II.D. of this release, it is the 
Commission's understanding that electronic recordkeeping systems 
used by nonbank SBS Entities as well as by broker-dealers for 
business purposes can be configured to meet the audit-trail 
requirement.
---------------------------------------------------------------------------

    As discussed above, a number of affected entities are dually 
registered with the CFTC as swap dealers. Under the CFTC's electronic 
recordkeeping rule, affected entities must configure their 
recordkeeping systems and have policies and procedures governing those 
systems that are designed to prevent records from being altered or 
erased.

B. Benefits of the Proposed Amendments

    The proposed amendments are intended to modernize the SBS Entity 
and broker-dealer recordkeeping rules given technological changes over 
the last two decades. The Commission preliminarily believes that by 
specifying that nonbank SBS Entities \141\ and broker-dealers may 
satisfy their electronic recordkeeping obligations through the WORM 
requirement or an audit-trail alternative, the proposed amendments may 
result in nonbank SBS Entities or broker-dealers updating electronic 
recordkeeping systems in ways that would lower compliance costs. For 
example, nonbank SBS Entities or broker-dealers may, among other 
things, reduce or eliminate duplicative compliance systems in 
circumstances where they currently maintain separate electronic 
recordkeeping systems primarily due to, as applicable, the WORM 
requirement or Rule 18a-6(e)'s electronic storage system requirements. 
The Commission expects that these reductions would primarily be 
realized by broker-dealers that may, for example, choose to adopt a 
single recordkeeping system that complies with the audit-trail 
requirement--for business and regulatory purposes. Below, the 
Commission estimates the reduction in initial and ongoing costs and 
burdens related to these proposals.\142\
---------------------------------------------------------------------------

    \141\ With respect to SBS Entities, the proposal would limit the 
electronic recordkeeping requirements to SBS Entities that do not 
have a prudential regulator in order to avoid subjecting bank SBS 
Entities to potentially differing requirements with respect to 
electronic record preservation. As discussed above, 26 SBS Entities 
have a prudential regulator (i.e., are bank SBS Entities). The 
exclusion of bank SBS Entities from the scope of the proposed 
electronic recordkeeping system requirements would reduce aggregate 
benefits and costs related to modifying electronic recordkeeping 
systems to conform to the proposed amendment to paragraph (e)(2) of 
Rule 18a-6.
    \142\ See section V.D. of this release (discussing increases and 
decreases in costs and burdens relating to proposals for purposes of 
the Paperwork Reduction Act).
---------------------------------------------------------------------------

    These aggregate cost savings may be reduced by three factors. 
First, some affected entities may have already streamlined their 
regulatory electronic recordkeeping systems with systems used for 
business records consistent with the Commission interpretations 
described above. Second, some affected entities may elect to upgrade 
existing business recordkeeping systems to accommodate the proposed 
audit-trail alternative. The affected entities that choose to undertake 
such upgrades may do so if aggregate savings from eliminating redundant 
electronic recordkeeping systems outweigh the costs of buildout for 
existing systems. The Commission expects that these costs would 
primarily be realized by broker-dealers. However, potential buildout 
costs may decrease the cost savings from the proposal. Third, because 
the proposal would not require broker-dealers to make changes to 
recordkeeping systems that are currently compliant with the WORM 
requirement, they may choose not to make any changes to recordkeeping 
systems. Such broker-dealers may, for example, choose to continue 
maintaining separate recordkeeping systems for business purposes and 
for regulatory purposes.
    The proposal may also benefit customers and counterparties of 
broker-dealers and nonbank SBS Entities. Specifically, to the extent 
that broker-

[[Page 68317]]

dealers and nonbank SBS Entities currently pass on part or all of their 
recordkeeping costs to their customers and counterparties, some of the 
above cost savings may flow through to customers and counterparties of 
broker-dealers and nonbank SBS Entities in the form of lower costs or 
greater availability of services. The extent to which cost savings are 
passed along to customers and counterparties will depend on several 
factors, including the price elasticity of the demand for broker-dealer 
and nonbank SBS Entity services, the substitutability of broker-dealers 
and nonbank SBS Entities, concentration in the broker-dealer and 
nonbank SBS Entity industries due to economies of scale, heterogeneity 
of broker-dealer and nonbank SBS Entity services, and market 
segmentation, among others.
    The proposal may also enhance Commission oversight of nonbank SBS 
Entities and broker-dealers. To the degree that the proposal may lead 
broker-dealers and nonbank SBS Entities to move to a single 
recordkeeping system for both business and regulatory purposes, and if 
affected entities direct compliance cost savings to investments in 
system improvements and maintenance, the reliability and efficiency of 
recordkeeping systems may increase. Moreover, the Commission 
preliminarily believes that the proposed audit-trail and WORM 
alternatives will provide flexibility for broker-dealers and nonbank 
SBS Entities, while still maintaining the essential ability of the 
Commission to access the entities' records in the course of 
examinations or other activities.
    The Commission preliminarily believes that some of the proposed 
amendments may provide compliance efficiencies. For example, the 
proposed amendments related to the verification of completeness and 
accuracy of the processes for retaining records electronically may 
introduce time efficiencies in achieving compliance when an original 
record is added to the electronic recordkeeping system. Similarly, 
proposed amendments to provide additional specificity to the 
obligations relating to the auditable system of controls required by 
paragraph (f)(3)(v) and Rule 17a-4 and Rule paragraph (e)(3)(v) of Rule 
18a-6 may introduce time and compliance efficiencies by lowering 
burdens on compliance professionals' time. Further, the Commission 
preliminarily believes that the elimination of the notification and 
representation requirements from Rule 17a-4(f) would alleviate some 
burden currently imposed on broker-dealers, as discussed below.\143\
---------------------------------------------------------------------------

    \143\ See section V.D. of this release (discussing increases and 
decreases in costs and burdens relating to proposals for purposes of 
the Paperwork Reduction Act).
---------------------------------------------------------------------------

    In addition, the proposed elimination of the third-party access and 
undertakings requirements may benefit affected entities by reducing 
cybersecurity and trade-secret risks attendant to requiring a third 
party to fulfill these responsibilities. Similarly, the proposed 
elimination of the escrow account option may reduce cybersecurity risk 
attendant to having this information held by a third party in 
escrow.\144\
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    \144\ The Commission does not expect significant benefits or 
costs associated with certain other amendments contemplated in the 
proposal that the Commission believes are technical in nature. These 
amendments include simplification of the introductory text of 
paragraph (f)(3) of Rule 17a-4 and paragraph (e)(3) of Rule 18a-6; 
amendments to paragraphs (f)(3)(i) of Rule 17a-4 and (e)(3)(i) of 
Rule 18a-6 to replace terms tied to micrographic media and optical 
disk technology; amendments to better clarify paragraph (f)(3)(ii) 
of Rule 17a-4 and paragraph (e)(3)(ii) of Rule 18a-6; and amendments 
moving the requirements for broker-dealers using micrographic media 
to new paragraph (f)(4) of Rule 17a-4.
---------------------------------------------------------------------------

    Certain of the proposed amendments may also incrementally improve 
regulatory oversight. For example, proposed amendments related to the 
ability to download and transfer records in human readable and 
reasonably usable electronic formats may facilitate more efficient 
Commission oversight as they would reduce the time costs of staff 
review of individual records as well as searching and sorting 
electronic records. Further, the proposed amendments requiring that a 
senior officer provide required undertakings may provide the Commission 
with a means to obtain records if an affected entity refuses to produce 
them in the normal course, which may enhance the efficiency of 
Commission examinations and oversight.

C. Costs of the Proposed Amendments

    The proposed amendments are intended to modernize the Commission's 
recordkeeping requirements and to reduce recordkeeping duplication by 
affected entities. However, as referenced above, the Commission 
recognizes that some broker-dealers and nonbank SBS Entities may bear 
costs from having to alter electronic recordkeeping systems currently 
used. Nonbank SBS Entities may, for example, need to alter electronic 
storage systems to comply with either the audit-trail or WORM 
requirement. In addition, broker-dealers may need to build new or alter 
existing electronic recordkeeping systems to the extent they would like 
to meet the audit-trail requirement. As noted below,\145\ based upon 
information provided to the Commission by the securities industry, the 
Commission estimates that the initial cost to build and implement a 
WORM-compliant electronic recordkeeping system for a large broker-
dealer is $10 million, with an additional cost of $1.2 million annually 
to maintain the system,\146\ and the Commission believes that the SBS 
Entities that would be affected by the proposed rule amendments are of 
large sizes comparable to the universe of broker-dealers that the 
rulemaking petitioners used to derive those estimates. In addition, 
based on feedback from the securities industry, the Commission believes 
that the initial cost to build and implement an electronic 
recordkeeping system that meets the audit-trail requirements and the 
ongoing cost to maintain the system would be substantially lower than 
the analogous costs that would be incurred with respect to a WORM-
compliant system.\147\ In particular, the Commission estimates that the 
initial cost to build and implement an electronic recordkeeping system 
that meets the audit-trail requirement for a large broker-dealer or SBS 
Entity without a prudential regulator and that is not a broker-dealer 
is $1,000,000, with an additional cost of $120,000 annually to maintain 
the system.
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    \145\ See section V.D. of this release (discussing decreases and 
increases in costs and burdens relating to proposals for purposes of 
the Paperwork Reduction Act).
    \146\ See 17a-4(f) Rulemaking Petition Addendum at 4-5.
    \147\ See e.g. Rule 17a-4(f) Rulemaking Petition at 6-7.
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    There are 802 broker-dealers with assets greater than $10 million 
and four SBSDs that would be subject to paragraph (e)(2) of Rule 18a-6. 
The Commission anticipates that eliminating the application of 
paragraph (e)(2) of Rule 18a-6 to the 21 SBSDs that have a prudential 
regulator and are subject to Rule 18a-6 would result in a decrease of 
100 hours per firm on an annual basis, or 2,100 hours per year for all 
firms affected by the proposed amendment, for an ongoing cost savings 
of $663,000 per year for all affected firms.\148\
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    \148\ 2,100 hours x $316 per hour (at the compliance manager 
rate) = $663,000.
---------------------------------------------------------------------------

    The Commission does not believe any broker-dealers or SBSDs will 
elect to build a WORM-compliant electronic recordkeeping system. 
Moreover, the Commission estimates that most of these firms have 
electronic recordkeeping

[[Page 68318]]

systems that could meet the audit-trail requirement or that could be 
configured to meet that requirement without the need to build a new 
system. The Commission estimates that 20 of these firms would elect to 
build a new electronic recordkeeping system to meet the audit-trail 
requirement for an initial one-time industry cost burden of $20,000,000 
and an annual cost burden of $2,400,000.
    The Commission estimates that the cost for the 2,749 broker-dealers 
with $10,000,000 or less in total assets to build and maintain an 
electronic recordkeeping system that meets the proposed audit-trail 
requirement would be significantly less than the $1,000,000 initial and 
$120,000 annual costs estimated for the 802 larger broker-dealers and 
four SBSDs that would be subject to paragraph (e)(2) of Rule 18a-6. 
Consequently, the Commission estimates that the initial cost to build 
and implement an electronic recordkeeping system that meets the audit-
trail requirement for these smaller broker-dealers is $100,000, with an 
additional cost of $12,000 annually to maintain the system. The 
Commission estimates that most of the 2,749 broker-dealers with 
$10,000,000 or less in total assets will continue to preserve records 
in the manner they do today: Using a WORM-compliant system, using 
micrographic media, or maintaining paper records. The Commission 
estimates that 80 of these firms would elect to build a new electronic 
recordkeeping system to meet the audit-trail requirement for an initial 
one-time industry cost burden of $8,000,000 and an annual cost burden 
of $960,000.
    The Commission believes that broker-dealers and SBS Entities would 
incur an initial burden and ongoing annual burden in establishing a 
backup electronic recordkeeping system. The Commission believes these 
burdens and costs would be substantially less than the burdens and 
costs of the primary electronic recordkeeping systems because of the 
benefit of economies of scale for the backup system whereby common 
technology and personnel could be used for both systems. The Commission 
estimates that the costs and burdens for the 802 larger broker-dealers 
and four SBSDs that would be subject to paragraph (e)(2) of Rule 18a-6 
would be $250,000 in initial burdens and costs and $30,000 in annual 
burdens and costs. Further, the Commission expects that the broker-
dealers and SBS Entities that have electronic recordkeeping systems 
that could meet the audit-trail requirement or that could be configured 
to meet that requirement without the need to build a new system also 
maintain backup recordkeeping systems for business continuity purposes. 
Therefore, the initial and annual costs would be incurred by the 20 
firms that elect to build a new electronic recordkeeping system that 
meets the proposed audit-trail requirements. Consequently, the 
Commission estimates that the industry-wide costs and burdens for these 
firms would be $5,000,000 in initial costs and burdens and $600,000 in 
annual costs and burdens.
    The Commission estimates that the costs and burdens incurred by the 
80 smaller broker-dealers that would build electronic recordkeeping 
systems to meet the audit-trail requirement and, therefore, need to 
build a backup recordkeeping system, would be substantially less than 
the costs and burdens incurred by the larger broker-dealers. The 
Commission estimates that these firms would incur an initial costs and 
burdens of $25,000 and ongoing annual costs and burdens of $3,000. 
Therefore, the Commission estimates that the industry-wide costs and 
burdens for these firms would be $2,000,000 in initial costs and 
burdens and $240,000 in ongoing annual costs and burdens.
    The Commission recognizes that the proposal would not harmonize 
with the parallel recordkeeping rule for CFTC registrants (e.g., 
futures commission merchants and swap dealers). In contrast, the 
proposal would impose a bright line audit-trail or WORM requirement. To 
the degree that such requirements may not satisfy CFTC requirements, a 
lack of harmonization in the recordkeeping requirement for registrants 
may give rise to compliance inefficiencies for broker dealers and SBS 
Entities that are dually registered with the CFTC.
    Certain other aspects of the proposed amendments may also impose 
costs on affected entities. Specifically, the proposed amendments 
related to human readable and reasonably usable electronic file formats 
may impose compliance costs related to the required updates to 
recordkeeping systems.\149\ Proposed amendments to third-party access 
and undertakings requirements may also impose additional time demands 
on senior officers, though these costs may be at least partially offset 
for broker-dealers by savings attendant to removing the requirement for 
third-party access. To the extent that these proposed requirements 
increase the scope of senior officer duties and increase potential 
liability on the part of senior officers, senior officers may demand 
higher compensation and liability insurance, which may result in an 
increase to senior officer recruitment and retention costs. Further, 
amendments requiring broker-dealers and SBS Entities to have a backup 
set of records when records are preserved on an electronic 
recordkeeping system may impose additional costs related to making 
updates to compliance systems, as compared to the current rules' 
requirements to store separately from originals a duplicate copy of a 
record.\150\
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    \149\ See section V.D. of this release (discussing increases and 
decreases in costs and burdens relating to proposals for purposes of 
the Paperwork Reduction Act).
    \150\ The Commission does not expect significant costs 
associated with certain other amendments contemplated in the 
proposal, including amendments to eliminate the notification and 
representation requirements from Rule 17a-4(f); amendments to 
eliminate the escrow account option from paragraph (f)(3)(vi) of 
Rule 17a-4 and paragraph (e)(3)(vi) of Rule 18a-6; and amendments to 
the requirements of paragraph (f)(2)(ii)(B) of Rule 17a-4 and 
paragraph (e)(2)(i) of Rule 18a-6 to provide additional specificity 
regarding the requirement that original records are completely and 
accurately captured.
---------------------------------------------------------------------------

D. Reasonable Alternatives

    The Commission has considered a number of alternatives. For 
example, the Commission has considered harmonizing the recordkeeping 
rules for SBS Entities with the CFTC's principles-based approach 
applicable to Swap Entities, but retaining the proposed audit-trail 
requirement for broker-dealers. As another alternative, the Commission 
considered harmonizing recordkeeping rules for both broker-dealers and 
SBS Entities with the CFTC's principles-based approach. These 
alternatives could enhance the cost savings from the proposal as 
affected entities may not need to modify their business recordkeeping 
systems to meet the proposed electronic recordkeeping system 
requirements, particularly with respect to nonbank SBS Entities that 
would need to use electronic recordkeeping systems that meet the WORM 
or audit-trail requirement. In addition, these alternatives could 
facilitate transactions across integrated swap and security-based swap 
markets. The Commission believes that its proposed rule amendments 
establishing electronic recordkeeping requirements for SBS Entities 
should provide greater protection to the original records created and 
preserved by SBS Entities, thereby giving regulators more reliable and 
secure access to those records. Unlike the CFTC's 2017 amendment, the 
Commission's proposal retains the WORM standard as a compliance option; 
the standard requires electronic

[[Page 68319]]

records to be maintained exclusively in a non-rewriteable, non-erasable 
format. The audit-trail alternative would require that the electronic 
records be preserved in a manner that permits the recreation of an 
original record if it is altered, over-written, or erased. Moreover, 
the Commission believes that its proposal addresses the same concerns 
addressed in the CFTC proposal, namely the security and authenticity of 
and access to records.\151\ Finally, the Commission preliminarily 
believes that the costs related to modification of existing business 
recordkeeping systems to meet the proposed electronic recordkeeping 
system requirements are likely to be low relative to the baseline 
ongoing costs of maintaining duplicative recordkeeping systems. Thus, 
the relative magnitude of this benefit of the alternative may be 
limited.
---------------------------------------------------------------------------

    \151\ Compare Rule 17a-5(f)(3), as proposed to be amended and 
Rule 18a-6(e)(3), as proposed to be amended, with CFTC Section 
1.31(d)(2).
---------------------------------------------------------------------------

    As another alternative, the Commission could require prudentially 
regulated SBS Entities to meet the proposed electronic recordkeeping 
system requirements. This alternative would expand the scope of 
application of the requirements, magnifying its benefits for Commission 
oversight as well as costs of altering existing recordkeeping systems. 
As a baseline matter, the Commission recognizes that prudentially 
regulated SBS Entities are subject to a robust system of recordkeeping 
requirements for different types of activities, including recordkeeping 
requirements under the Bank Secrecy Act regarding funds transfers equal 
to or greater than $3,000; \152\ recordkeeping requirements regarding 
fiduciary accounts; \153\ recordkeeping requirements for securities 
transactions; \154\ and recordkeeping requirements for small business 
and farm loans, including a requirement to maintain the information in 
machine readable form.\155\ Importantly, as discussed above, the 
Commission preliminarily believes that the proposed rule's requirements 
may conflict or overlap with the recordkeeping systems banks have 
implemented under regulations or guidance of the prudential regulators. 
The Commission preliminarily believes that requiring prudentially 
regulated SBS Entities to meet the proposed electronic recordkeeping 
system requirements (in addition to the recordkeeping requirements 
these entities are already subject to) would not create significant 
incremental benefits.
---------------------------------------------------------------------------

    \152\ See, e.g., 31 CFR 1020.410.
    \153\ See 12 CFR 9.8.
    \154\ See 12 CFR 12.3.
    \155\ See 12 CFR 25.42.
---------------------------------------------------------------------------

    As another alternative, the Commission could have proposed 
eliminating the WORM alternative and requiring all broker-dealers and 
nonbank SBS Entities to comply with an audit-trail requirement. This 
alternative would require all affected entities to modernize their 
recordkeeping systems to meet the audit-trail requirement. While this 
alternative could produce long-term compliance efficiencies for a 
greater number of affected participants, it would also require all 
affected entities with WORM compliant systems to upgrade their 
electronic recordkeeping systems. Since compliance costs may be 
particularly burdensome for smaller entities, the alternative could 
have a disproportionate effect on smaller and medium-sized broker-
dealers.
    Finally, the Commission could have proposed requiring that a second 
senior officer has independent access to and the ability to provide the 
records and to execute the undertakings at all times. To the degree 
that relying on a single senior officer may present risks that the 
senior officer is unable or unwilling to obtain records, this 
alternative could increase the probability that the Commission would be 
able to access records. Thus, relative to the proposal, the alternative 
may further enhance the efficiency of Commission examinations and 
oversight. However, this alternative may impose additional time demands 
on a second senior officer in each affected entity. To the extent that 
the alternative would increase the scope of duties and increase 
potential liability on the part of a greater number of senior officers 
of affected entities, more senior officers may demand higher 
compensation and liability insurance, which may result in a greater 
increase to senior officer recruitment and retention costs relative to 
the proposal. Requiring a second individual to have the authority to 
grant access to the records may potentially increase cybersecurity 
risks compared to the proposed approach, although it would likely still 
represent less risk than the baseline third-party approach.

E. Effects on Efficiency, Competition, and Capital Formation

    The primary effect of the proposed amendments on efficiency would 
stem from increased efficiency of broker-dealer and SBS Entity 
recordkeeping. Permitting either the audit-trail or WORM (introduced in 
the optical disk era) alternative is intended to allow broker-dealers 
and SBS Entities to modernize the records and systems such entities 
maintain for regulatory purposes. The Commission anticipates that most 
of the affected entities would respond to such a requirement by 
eliminating duplicative recordkeeping for regulatory and business 
purposes, giving rise to cost efficiencies discussed above. The 
proposal would not alter the amount, type, or manner of disclosures 
available to investors or the Commission, nor would it change broker-
dealer or SBS Entity business models or activities. Thus, the 
Commission does not anticipate the proposal to impact informational or 
allocative efficiency.
    The proposed amendments are not expected to significantly impact 
competition between bank and nonbank SBS Entities. As described above, 
the proposal would impose electronic recordkeeping system requirements 
(including the audit-trail alternative) on nonbank SBS Entities, but 
not on bank SBS Entities. Transitioning regulatory recordkeeping 
systems from hardware solutions (such as optical disks) meeting the 
WORM requirement to electronic records compliant with the audit-trail 
requirement may require costly modifications to existing recordkeeping 
systems of broker-dealers and nonbank SBS Entities may need to modify 
existing electronic recordkeeping systems to meet either the WORM or 
audit-trail requirement; bank SBS Entities would not bear such costs.
    To the extent that the proposal results in cost savings for broker-
dealers and SBS Entities estimated above, affected entities may be able 
to allocate newly available capital into capital forming activities. 
However, it is not clear that affected entities would direct cost 
savings to expanding their financial intermediation business and given 
the magnitude of the cost savings estimated above, the capital 
formation effects of the proposal are likely limited. Therefore, the 
proposal is also not expected to have significant effects on capital 
formation.

F. Request for Comment

    The Commission requests comment on all aspects of the economic 
analysis of the proposed amendments. To the extent possible, the 
Commission requests that commenters provide supporting data and 
analysis with respect to the benefits, costs, and effects on 
competition, efficiency, and capital formation of adopting the proposed 
amendments or any reasonable alternatives. In particular, the 
Commission asks commenters to consider the following questions:
    1. What additional qualitative or quantitative information should 
the Commission consider as part of the

[[Page 68320]]

baseline for its economic analysis of these amendments? How many 
broker-dealers are maintaining separate recordkeeping systems for 
business and regulatory purposes? How many broker-dealers and SBS 
Entities affected by the proposed amendments have electronic 
recordkeeping systems that would meet the proposed audit-trail 
requirement?
    2. Has the Commission accurately characterized the costs and 
benefits of proposed amendments? If not, why not? Should any of the 
costs or benefits be modified? What, if any, other costs or benefits 
should the Commission take into account? If possible, please offer ways 
of estimating these costs and benefits. What additional considerations 
can the Commission use to estimate the costs and benefits of the 
proposed amendments?
    3. Has the Commission accurately characterized the effects on 
competition, efficiency, and capital formation arising from the 
proposed amendments? If not, why not?
    4. Has the Commission accurately characterized the economic effects 
of the above alternatives? For example, has the Commission accurately 
characterized the economic effects of the alternative requiring 
prudentially regulated SBS Entities to meet the proposed electronic 
recordkeeping system requirements? If not, why not? Should any of the 
costs or benefits be modified? What, if any, other costs or benefits 
should the Commission take into account?
    5. Are there other reasonable alternatives to the proposed 
amendments? What are the economic effects of any other alternatives?
    6. Are there data sources or data sets that can help the Commission 
refine its estimates of the costs and benefits associated with the 
proposed amendments? If so, please identify them.

V. Paperwork Reduction Act

    Certain provisions of the rule amendments proposed in this release 
would contain a new ``collection of information'' within the meaning of 
the Paperwork Reduction Act of 1995 (``PRA'').\156\ The Commission is 
submitting the proposed rule amendments and proposed new rules to the 
Office of Management and Budget (``OMB'') for review and approval in 
accordance with the PRA and its implementing regulations.\157\ An 
agency may not conduct or sponsor, and a person is not required to 
respond to a collection of information unless it displays a currently 
valid OMB control number.\158\ The titles for the collections of 
information are:
---------------------------------------------------------------------------

    \156\ See 44 U.S.C. 3501 et seq.
    \157\ See 44 U.S.C. 3507; 5 CFR 1320.11.
    \158\ See 5 CFR 1320.11(l).
---------------------------------------------------------------------------

    (1) Rule 17a-4--Records to be preserved by certain brokers and 
dealers (OMB control number 3235-0279); and
    (2) Rule 18a-6--Records to be preserved by certain security-based 
swap dealers and major security-based swap participants (OMB control 
number 3235-0751).
    The burden estimates contained in this section do not include any 
other possible costs or economic effects beyond the burdens required to 
be calculated for PRA purposes.

A. Summary of Collections of Information

1. Proposed Amendments to Rules 17a-4(f) and 18a-6(e)
    Rule 17a-4 sets forth record preservation requirements applicable 
to broker-dealers, including broker-dealers also registered as SBSDs or 
MSBSPs.\159\ Rule 18a-6 sets forth record preservation requirements 
applicable to SBS Entities that are not dually registered as broker-
dealers.\160\ The Commission is proposing to amend Rules 17a-4(f) \161\ 
and 18a-6(e),\162\ which prescribe requirements for broker-dealers and 
SBS Entities, respectively, that elect to preserve records 
electronically to comply with the record preservation requirements of 
Rules 17a-4 and 18a-6, respectively.
---------------------------------------------------------------------------

    \159\ See 17 CFR 240.17a-4. As stated above, the term ``broker-
dealer'' for the purposes of this release includes broker-dealers 
that are also registered as SBSDs or MSBSPs.
    \160\ See 17 CFR 240.18a-6. As stated above, the term ``SBS 
Entity'' for the purposes of this release refers to SBSDs and MSBSPs 
that are not also registered as broker-dealers.
    \161\ See Rule 17a-4(f) (setting forth the electronic record 
preservation requirements for broker-dealers).
    \162\ See Rule 18a-6(e) (setting forth the electronic record 
preservation requirements for SBS Entities).
---------------------------------------------------------------------------

    The proposed amendments to Rule 17a-4(f) would add the audit-trail 
alternative to the current WORM requirement.\163\ The amendments to 
Rule 18a-6(e) would add a requirement that electronic recordkeeping 
systems used by nonbank SBS Entities to comply with the record 
preservation requirements of Rule 18a-6 must meet either the audit-
trail or WORM requirement.\164\
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    \163\ See section II.D. of this release (discussing these 
proposed amendments).
    \164\ As defined above, the term ``nonbank SBS Entity'' refers 
to an SBS Entity that does not have a prudential regulator and the 
term ``bank SBS Entity'' refers to an SBS Entity that has a 
prudential regulator.
---------------------------------------------------------------------------

    Rule 17a-4(f) currently requires a broker-dealer to store 
separately from the original, on any medium acceptable under Rule 17a-
4, a duplicate copy of a record for the requisite time period. 
Similarly, Rule 18a-6(e) currently requires that an SBS Entity store 
separately from the original a duplicate copy of a record stored on the 
electronic storage system for the requisite time period. These current 
provisions require broker-dealers and SBS Entities to maintain a second 
copy of a record. The Commission is proposing amendments to both of 
these paragraphs to require the broker-dealer and the SBS Entity to 
have a backup set of records when records are preserved on an 
electronic recordkeeping system.\165\ Under the proposal, the broker-
dealer or SBS Entity would need to have a second electronic 
recordkeeping system.
---------------------------------------------------------------------------

    \165\ See section II.E. of this release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

    Rule 17a-4(f) currently requires that, for every broker-dealer 
exclusively using electronic storage media for some or all of its 
record preservation, at least one third party, who has access to and 
the ability to download information from the broker-dealer's electronic 
storage media to any acceptable medium under Rule 17a-4, must file with 
the DEA for the broker-dealer certain undertakings that the third party 
will provide access to the broker-dealer's electronic records and 
provide them to the Commission and other securities regulators if 
requested. The proposed amendments to Rule 17a-4(f) would eliminate the 
third-party access and undertakings requirements and replace them with 
a requirement that a senior officer of the broker-dealer have the 
access and provide the necessary undertakings.\166\ Rule 18a-6(e) 
currently does not have third-party access and undertakings 
requirements; the proposed amendments to the rule would add senior 
officer access and undertakings requirements analogous to that of Rule 
17a-4(f), as proposed to be amended.\167\
---------------------------------------------------------------------------

    \166\ Id.
    \167\ Id.
---------------------------------------------------------------------------

    The Commission is proposing to no longer impose the requirements 
for electronic recordkeeping systems in paragraph (e)(2) of Rule 18a-6, 
as proposed to be amended, on bank SBS Entities.\168\ However, the 
other provisions of paragraph (e) of Rule 18a-6, as proposed to be 
amended, would continue to apply to all SBS Entities.
---------------------------------------------------------------------------

    \168\ See section II.D. of this release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

    The Commission is proposing to move the requirements for broker-
dealers using micrographic media to new

[[Page 68321]]

paragraph (f)(4) of Rule 17a-4.\169\ Rule 18a-6(e) does not provide for 
retaining records using micrographic media.
---------------------------------------------------------------------------

    \169\ See section II.F. of this release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

    The proposed amendments to Rule 17a-4(f) would eliminate a 
requirement that the broker-dealer notify its DEA before employing an 
electronic recordkeeping system.\170\ Rule 18a-6(e) currently does not 
have a similar DEA notification requirement.
---------------------------------------------------------------------------

    \170\ See section II.C. of this release (discussing these 
proposed amendments).
---------------------------------------------------------------------------

2. Proposed Amendments to Rules 17a-4(j) and 18a-6(g)
    Rule 17a-4(j) requires broker-dealers to furnish promptly to the 
Commission legible, true, complete, and current copies of those records 
of the firm that are required to be preserved under Rule 17a-4 or any 
other record of the firm that is subject to examination under Section 
17(b) of the Exchange Act.\171\ Rule 18a-6(g) requires SBS Entities to 
furnish promptly to a representative of the Commission legible, true, 
complete, and current copies of those records of the firm that are 
required to be preserved under Rule 18a-6, or any other records of the 
firm subject to examination or required to be made or maintained 
pursuant to Section 15F of the Exchange Act.\172\
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    \171\ See Rule 17a-4(j) (setting forth the prompt production of 
records requirements for broker-dealers); 15 U.S.C. 78q(b).
    \172\ See Rule 18a-6(g) (setting forth the prompt production of 
records requirements for SBS Entities); 15 U.S.C. 78o-10(f).
---------------------------------------------------------------------------

    The Commission is proposing to amend the prompt production of 
records requirements of Rules 17a-4(j) and 18a-6(g).\173\ The proposed 
amendments to Rules 17a-4(j) and 18a-6(g) would require a broker-dealer 
or SBS Entity, respectively, to furnish a record and its audit trail 
(if applicable) preserved on an electronic recordkeeping system 
pursuant to Rules 17a-4(f) and 18a-6(e), respectively, in a reasonably 
usable electronic format, if requested by a representative of the 
Commission.\174\
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    \173\ See section II.G. of this release (discussing these 
proposed amendments).
    \174\ See Rule 17a-4(j) and Rule 18a-6(g), as proposed to be 
amended.
---------------------------------------------------------------------------

B. Proposed Use of Information

    The requirements of Rules 17a-4 and 18a-6, and the proposed 
amendments to these rules, are designed, among other things, to promote 
the prudent operation of broker-dealers and SBS Entities and to assist 
the Commission, SROs, and state securities regulators in conducting 
effective examinations.\175\ The proposed amendments to Rules 17a-4(j) 
and 18a-(g) are designed to facilitate examinations and other 
regulatory reviews by making them more efficient. Taken as a whole, the 
collections of information under the proposed amendments to Rules 17a-
4(f), 18a-6(e), 17a-4(j), and 18a-6(g) would promote the prudent 
operation of broker-dealers and SBS Entities and facilitate the 
examinations of broker-dealers and SBS Entities by the Commission, 
SROs, and state securities regulators.
---------------------------------------------------------------------------

    \175\ See, e.g., Books and Records Requirements for Brokers and 
Dealers Under the Securities Exchange Act of 1934, Exchange Act 
Release No. 44992 (Oct. 26, 2001), 66 FR 55818 (Nov. 2, 2001) (``The 
Commission has required that broker-dealers create and maintain 
certain records so that, among other things, the Commission, [SROs], 
and State Securities Regulators . . . may conduct effective 
examinations of broker-dealers'' (footnote omitted)).
---------------------------------------------------------------------------

C. Respondents

    As of December 31, 2020, there were 3,551 broker-dealers registered 
with the Commission.\176\ As of November 9, 2021, 41 SBSDs have 
registered with the Commission, while no MSBSPs have registered with 
the Commission.\177\ Six of the SBSDs are existing broker-dealers or 
will be broker-dealers and, therefore, are included in the 3,551 
broker-dealers. Nine of the SBSDs are applying substituted compliance 
with respect to the requirements of Rule 18a-6(e).\178\ One SBSD is 
using the alternative compliance mechanism of Exchange Act Rule 18a-10 
and, therefore, is complying with the CFTC's recordkeeping rules.\179\ 
This leaves 25 SBSDs that are subject to Rule 18a-6(e) and, therefore, 
would be subject to the proposed amendments to that rule. Twenty-one of 
these SBSDs have a prudential regulator. This leaves four SBSDs that 
would be subject to paragraph (e)(2) of Rule 18a-6. Finally, 24 of the 
25 SBSDs subject to Rule 18a-6(e) are also registered with the CFTC as 
swap dealers.
---------------------------------------------------------------------------

    \176\ This estimate is derived from broker-dealer FOCUS filings 
as of December 31, 2020, as described in greater detail in the 
economic baseline, and is inclusive of five OTC derivatives dealers 
affected by the proposed amendments.
    \177\ See List of Registered Security-Based Swap Dealers and 
Major Security-Based Swap Participants, available at: https://www.sec.gov/tm/List-of-SBS-Dealers-and-Major-SBS-Participants.
    \178\ See Substituted Compliance Notices, available at: https://www.sec.gov/tm/Substituted-compliance-Notices.
    \179\ See 17 CFR 240.18a-10.
---------------------------------------------------------------------------

    The following table summarizes the estimated number of respondents 
that would be subject to the amendments to Rule 17a-4(f) and the number 
of SBSDs that would be subject to the amendments to Rule 18a-6(e) and 
paragraph (e)(2) of Rule 18a-6.

------------------------------------------------------------------------
                   Type of registrant                         Number
------------------------------------------------------------------------
Broker-dealers (including SBSDs dually registered as               3,551
 broker-dealers)........................................
SBSDs that would be subject to Rule 18a-6(e) as proposed              25
 to be amended..........................................
SBSDs that would be subject to Rule 18a-6(e)(2) as                     4
 proposed to be amended.................................
------------------------------------------------------------------------

    Based upon the recent experience of the staff, the Commission 
estimates that approximately 95% of the broker-dealers, including 
broker-dealers that will be dually registered as SBS Entities, (i.e., 
3,373 broker-dealers) use electronic recordkeeping systems; all of 
these firms are expected to continue to use electronic recordkeeping 
systems pursuant to the requirements of Rule 17a-4(f), as proposed to 
be amended. The Commission believes that all SBSDs that are subject to 
Rule 18a-6(e) (25 SBSDs) use electronic recordkeeping systems pursuant 
to the requirements of Rule 18a-6(e) and would continue to do so under 
the proposed amendments.

D. Total Initial and Annual Reporting Burdens

1. Proposed Amendments to Rules 17a-4(f) and 18a-6(e)
    Rules 17a-4(f) and 18a-6(e) currently impose collection of 
information requirements that result in initial and annual time burdens 
for broker-dealers and SBSDs. The proposed amendments to these rules 
would both add to and decrease the current time burden estimates as 
explained below.
    The proposed amendments to Rule 17a-4(f) would provide an audit-
trail alternative to the current WORM requirement for electronic 
recordkeeping systems used by broker-dealers to meet the record 
preservation requirements of Rule 17a-4.\180\ Consequently, broker-
dealers could continue to meet the requirements of the rule by using a 
WORM-compliant electronic recordkeeping system they employ today. The 
amendments to Rule 18a-6(e) would add a requirement that electronic 
recordkeeping systems used by nonbank SBSDs to comply with the record 
preservation requirements of Rule 18a-6 must meet either the audit-
trail or WORM requirement.\181\
---------------------------------------------------------------------------

    \180\ See section II.D. of this release (discussing these 
proposed amendments).
    \181\ Id.
---------------------------------------------------------------------------

    The Commission believes that few, if any, broker-dealers or nonbank 
SBSDs that use electronic recordkeeping systems are not currently 
compliant with the rules, as proposed to be amended, either because 
they currently

[[Page 68322]]

use an electronic recordkeeping system that meets the WORM requirement 
or that could meet the proposed audit-trail requirement. Indeed, the 
Commission believes that some broker-dealers and nonbank SBSDs are 
using a modern, audit-trail compliant electronic recordkeeping system 
for their own business purposes while simultaneously maintaining a 
WORM-compliant system solely for the purpose of complying with the 
requirements of Rule 17a-4(f).
    A broker-dealer that does not preserve records electronically would 
incur initial costs to build an electronic recordkeeping system that 
meets either the WORM requirement or the audit-trail requirement or 
would have the initial burden of hiring a vendor to provide the 
service. A broker-dealer that preserves records electronically using a 
WORM-compliant electronic recordkeeping system would have an initial 
burden to build an electronic recordkeeping system that meets the 
audit-trail requirement, if it elects to use that alternative. An SBSD 
would have an initial burden build an electronic recordkeeping system 
that meets either the WORM requirement or the audit-trail requirement 
or would have the initial burden of hiring a vendor to provide the 
service. Similarly, on an ongoing basis, the broker-dealer or SBSD 
would be required to expend financial or human resources to maintain 
their recordkeeping systems to comply with the proposed audit-trail or 
WORM requirements.
    Based upon information provided to the Commission by the securities 
industry, the Commission estimates that the initial cost to build and 
implement a WORM-compliant electronic recordkeeping system for a large 
broker-dealer is $10 million, with an additional cost of $1.2 million 
annually to maintain the system.\182\ Based on feedback from the 
securities industry, the Commission believes that the initial cost to 
build and implement an electronic recordkeeping system that meets the 
audit-trail requirements and the ongoing cost to maintain the system 
would be substantially lower than the analogous costs that would be 
incurred with respect to a WORM-compliant system.\183\ Consequently, 
the Commission estimates that the initial cost to build and implement 
an electronic recordkeeping system that meets the audit-trail 
requirement for a large broker-dealer is $1,000,000, with an additional 
cost of $120,000 annually to maintain the system. There are 802 broker-
dealers with assets greater than $10 million and there are four SBSDs 
that would be subject to paragraph (e)(2) of Rule 18a-6. The Commission 
does not believe any of these firms will elect to build a WORM-
compliant electronic recordkeeping system. Moreover, the Commission 
estimates that most of these firms have electronic recordkeeping 
systems that could meet the audit-trail requirement or that could be 
configured to meet that requirement without the need to build a new 
system. The Commission estimates that 20 of these firms would elect to 
build a new electronic recordkeeping system to meet the audit-trail 
requirement for an initial one-time industry cost burden of $20,000,000 
and an annual cost burden of $2,400,000.
---------------------------------------------------------------------------

    \182\ See Rule 17a-4(f) Rulemaking Petition Addendum at 4-5.
    \183\ See e.g. Rule 17a-4(f) Rulemaking Petition at 6-7.
---------------------------------------------------------------------------

    The Commission estimates that the cost for the 2,749 broker-dealers 
with $10,000,000 or less in total assets to build and maintain an 
electronic recordkeeping system that meets the proposed audit-trail 
requirement would be significantly less than the $1,000,000 initial and 
$120,000 annual costs estimated for the 802 larger broker-dealers and 
the four SBSDs that would be subject to paragraph (e)(2) of Rule 18a-6. 
Consequently, the Commission estimates that the initial cost to build 
and implement an electronic recordkeeping system that meets the audit-
trail requirement for these smaller broker-dealers is $100,000, with an 
additional cost of $12,000 annually to maintain the system. The 
Commission estimates that most of the 2,749 broker-dealers with 
$10,000,000 or less in total assets will continue to preserve records 
in the manner they do today: Using a WORM-compliant system, using 
micrographic media, or maintaining paper records. The Commission 
estimates that 80 of these firms would elect to build a new electronic 
recordkeeping system to meet the audit-trail requirement for an initial 
one-time industry cost burden of $8,000,000 and an annual cost burden 
of $960,000.
    The Commission believes that broker-dealers and SBSDs would incur 
an initial burden and ongoing annual burden in establishing a backup 
electronic recordkeeping system. The Commission believes these burdens 
and costs would be substantially less than the burdens and costs of the 
primary electronic recordkeeping systems because of the benefit of 
economies of scale for the backup system whereby common technology and 
personnel could be used for both systems. The Commission estimates that 
the costs and burdens for the 802 larger broker-dealers and the four 
SBSDs that would be subject to paragraph (e)(2) of Rule 18a-6 would be 
$250,000 in initial burdens and costs and $30,000 in annual burdens and 
costs. Further, the Commission expects that the broker-dealers and 
SBSDs that have electronic recordkeeping systems that could meet the 
audit-trail requirement or that could be configured to meet that 
requirement without the need to build a new system also maintain backup 
recordkeeping systems for business continuity purposes. Therefore, the 
initial and annual costs would be incurred by the 20 firms that elect 
to build a new electronic recordkeeping system that meets that proposed 
audit-trail requirement. Consequently, the Commission estimates that 
the industry-wide costs and burdens for these firms would be $5,000,000 
in initial costs and burdens and $600,000 in annual costs and burdens.
    The Commission estimates that the costs and burdens incurred by the 
80 smaller broker-dealers that would build electronic recordkeeping 
systems to meet the audit-trail requirement and, therefore, need to 
build a backup recordkeeping system, would be substantially less than 
the costs and burdens incurred by the larger broker-dealers. The 
Commission estimates that these firms would incur an initial costs and 
burdens of $25,000 and ongoing annual costs and burdens of $3,000. 
Therefore, the Commission estimates that the industry-wide costs and 
burdens for these firms would be $2,000,000 in initial costs and 
burdens and $240,000 in ongoing annual costs and burdens.
    The proposed amendments to Rule 17a-4(f) would eliminate the third-
party access and undertakings requirements and replace them with a 
requirement that a senior officer of the broker-dealer have the access 
and provide the necessary undertakings. Based on the Commission's most 
recent information submitted to the OMB in connection with the renewal 
of Rule 17a-4, this would result in an estimated elimination of an 
annual cost of less than $5,000 that the broker-dealer must incur in 
paying a third party to agree to perform this service. Rule 18a-6(e) 
does not contain a third-party undertakings requirement; however, the 
proposed amendments to the rule would add senior officer access and 
undertakings requirements analogous to that of Rule 17a-4(f), as 
proposed to be amended.\184\

[[Page 68323]]

The Commission believes that the change, in the case of broker-dealers, 
from a third party to a senior officer requirement and, in the case of 
SBSDs, the addition of a senior officer requirement, would result in a 
one-time initial burden of one hour per firm, for a total of 3,373 
hours for an initial cost of $1,676,381 under Rule 17a-4(f) and 25 
hours for an initial cost of $12,425 for SBSDs under Rule 18a-
6(e).\185\ The Commission also believes that the senior officer 
requirement would add an annual burden of one hour per firm, for a 
total of 3,373 hours for broker-dealers collectively \186\ for a total 
ongoing cost of $1,676,381, and 25 hours for a total ongoing cost of 
$12,425 for SBSDs collectively.\187\
---------------------------------------------------------------------------

    \184\ As noted above, paragraph (f) of Rule 18a-6 currently 
includes a requirement that if the records required to be maintained 
and preserved by the SBS Entity (whether electronic or otherwise) 
are prepared or maintained by a third party on behalf of the SBS 
Entity, the third party must file undertakings with the Commission. 
See paragraph (f) of Rule 18a-6.
    \185\ Throughout this section, to monetize the internal costs 
the Commission staff used data from the SIFMA publications, 
Management and Professional Earnings in the Securities Industry--
2013, and Office Salaries in the Securities Industry--2013, modified 
by the Commission staff to account for an 1800 hour work-year and 
multiplied by 5.35 (professionals) or 2.93 (office) to account for 
bonuses, firm size, employee benefits and overhead. These figures 
have been adjusted for inflation through the end of 2020 using data 
published by the Bureau of Labor Statistics.
     One-time initial cost for broker-dealers: 3,373 hours x $497 
per hour (at the controller hourly rate) = $1,676,381. One time 
initial cost for SBSDs: 25 hours x $497 per hour (at the controller 
hourly rate) = $12,425.
    \186\ The Commission believes that while the existing third-
party requirement is an external burden, the proposed senior officer 
requirement would be an internal burden required to be accounted for 
in this section.
    \187\ Ongoing cost for broker-dealers: 3,373 hours x $497 per 
hour (at the controller hourly rate) = $1,676,381. Ongoing cost for 
SBSDs: 25 hours x $497 per hour (at the controller hourly rate) = 
$12,425.
---------------------------------------------------------------------------

    The proposed amendments would move existing requirements for 
broker-dealers using micrographic media from paragraph (f)(3)(i) of 
Rule 17a-4 to proposed new paragraph (f)(4) of Rule 17a-4, but do not 
change the substantive requirements. The proposed amendments do not 
propose a micrographic media alternative for SBS Entities for the 
reasons described above. The Commission does not believe the proposed 
amendments relating to micrographic media would have any impact on the 
burden experienced by broker-dealers.
    The Commission anticipates that eliminating the application of 
paragraph (e)(2) of Rule 18a-6 to the 21 SBSDs that have a prudential 
regulator and are subject to Rule 18a-6 would result in a decrease of 
100 hours per firm on an annual basis, or 2,100 hours per year for all 
firms affected by the proposed amendment, for an ongoing cost savings 
of $663,000 per year for all affected firms.\188\
---------------------------------------------------------------------------

    \188\ 2,100 hours x $316 per hour (at the compliance manager 
rate) = $663,000.
---------------------------------------------------------------------------

    Finally, based upon information provided to the Commission from 
FINRA staff, the Commission believes that the elimination of the DEA 
notification requirement would decrease the industry-wide burden of 
compliance by one hour per broker-dealer submitting the notice to its 
DEA, or approximately 433 hours per year, for an ongoing cost savings 
of $136,828 \189\ per year for the industry.
---------------------------------------------------------------------------

    \189\ 433 hours x $316 per hour (at the compliance manager rate) 
= $136,828.
---------------------------------------------------------------------------

2. Proposed Amendments to Rules 17a-4(j) and 18a-6(g)
    The proposed amendments to Rules 17a-4(j) and 18a-6(g) would 
require a broker-dealer or SBS Entity, respectively, to furnish a 
record and its audit trail (if applicable) preserved on an electronic 
recordkeeping system pursuant to Rules 17a-4(f) and 18a-6(g), 
respectively, in a reasonably usable electronic format, if requested by 
a representative of the Commission. The Commission does not believe 
that these proposed amendments will change the initial or annual hourly 
burden for broker-dealers or SBS Entities. The Commission solicits 
comment on what the estimated initial and annual burden is for broker-
dealers and SBS Entities to comply with current versions Rule 17a-4(j) 
and Rule 18a-6(g) and for those firms to comply with those rules, as 
proposed to be amended.

E. Collection of Information Is Mandatory

    The collections of information pursuant to the proposed amendments 
are mandatory, as applicable, for broker-dealers and SBS Entities.

F. Confidentiality of Responses to Collection of Information

    A broker-dealer or SBS Entity requested by the Commission to 
produce records retained electronically pursuant to the requirements of 
Rules 17a-4 or 18a-6 can request confidential treatment of the 
information.\190\ If such confidential treatment request is made, the 
Commission anticipates that it will keep the information confidential 
subject to applicable law.\191\
---------------------------------------------------------------------------

    \190\ See 17 CFR 200.83. Information regarding requests for 
confidential treatment of information submitted to the Commission is 
available on the Commission's website at https://www.sec.gov/foia/howfo2.htm#privacy.
    \191\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing 
the public availability of information obtained by the Commission).
---------------------------------------------------------------------------

G. Retention Period for Recordkeeping Requirements

    Rule 17a-4, as proposed to be amended, specifies the required 
retention periods for records required to be made and preserved by a 
broker-dealer, whether electronically or otherwise.\192\ Rule 18a-6, as 
proposed to be amended, specifies the required retention periods for 
records required to be made and preserved by an SBS Entity, whether 
electronically or otherwise.\193\ Many of the required records must be 
retained for three years; certain other records must be retained for 
longer periods.\194\
---------------------------------------------------------------------------

    \192\ See Rule 17a-4, as proposed to be amended.
    \193\ See Rule 18a-6, as proposed to be amended.
    \194\ See Rules 17a-4 and 18a-6, as proposed to be amended.
---------------------------------------------------------------------------

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comment on the proposed collections of information in order to:
     Evaluate whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
Commission, including whether the information would have practical 
utility;
     Evaluate the accuracy of the Commission's estimates of the 
burden of the proposed collections of information;
     Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected; and
     Evaluate whether there are ways to minimize the burden of 
the collection of information on those who respond, including through 
the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Vanessa A. Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090, with reference to File Number S7-19-21. 
Requests for materials submitted to OMB by the Commission with regard 
to this collection of information should be in writing, with reference 
to File Number S7-19-21 and be submitted to the Securities and Exchange 
Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC 
20549-2736. As OMB is required to make a decision

[[Page 68324]]

concerning the collections of information between 30 and 60 days after 
publication, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication.

VI. Initial Regulatory Flexibility Act Analysis

A. Reasons for, and Objectives of, the Proposed Action

    The proposed amendments to Rules 17a-4 and 18a-6 are designed to 
modernize the electronic recordkeeping requirements for broker-dealers 
and SBS Entities, and to align the requirements in those rules more 
closely to the current electronic recordkeeping practices of broker-
dealers and SBS Entities. As discussed in greater detail above, the 
amendments to Rule 17a-4 would provide an audit-trail alternative to 
the current requirement that broker-dealer electronic records be 
preserved exclusively in a non-rewriteable, non-erasable format. The 
audit-trail alternative would require that the electronic records be 
preserved in a manner that permits the recreation of an original record 
if it is altered, over-written, or erased. Rule 18a-6, which applies to 
SBS Entities, currently does not have a requirement to preserve 
electronic records: (1) In a manner that permits the recreation of an 
original record if it is altered, over-written or erased; or (2) 
exclusively in a non-rewriteable, non-erasable format. The amendments 
to Rule 18a-6 would require an SBS Entity without a prudential 
regulator that preserves records electronically to meet one of these 
two requirements. The Commission believes that the amendments will save 
many broker-dealers and SBS Entities from the burden of maintaining two 
sets of parallel records: one for business purposes, preserved in a 
manner that would fulfill the audit-trail alternative requirements that 
the Commission is proposing, and another set of records that is 
preserved in a non-rewritable, non-erasable method in order to comply 
with the current requirements of 17a-4(f).
    The proposed amendments also would eliminate the third-party access 
and undertakings requirements and replace them with a requirement that 
a senior officer of the broker-dealer provide the access and 
undertakings. The Commission preliminarily believes that the existing 
third-party access and undertakings requirements are outdated in light 
of the changed technological environment and that providing a third 
party access to electronic recordkeeping systems and customer 
information needlessly exposes firms to data leakage and cybersecurity 
threats. The Commission preliminarily believes replacing the third-
party access and undertakings requirements with a requirement that a 
senior officer provide access and the undertakings would address 
cybersecurity and trade-secret concerns about requiring a third party 
to fulfill this responsibility.
    In addition, the amendments would add a requirement to Rule 17a-
4(j) and 18a-6(g) that a broker-dealer or SBS Entity, respectively, 
furnish a record and its audit trail (if applicable) preserved on an 
electronic recordkeeping system pursuant Rules 17a-4(f) and 18a-6(g), 
respectively, in a reasonably usable electronic format, if requested by 
a representative of the Commission. The Commission believes that the 
production of records in a reasonably usable electronic format would 
facilitate examinations and other regulatory reviews by making them 
more efficient.
    The amendments to Rule 17a-4 also would eliminate a requirement 
that the broker-dealer notify its DEA before employing an electronic 
recordkeeping system. The Commission preliminarily believes this 
requirement is no longer necessary because the rule was adopted at a 
time when the use of electronic recordkeeping systems by broker-dealers 
to meet the record preservation requirements of Rule 17a-4 was a 
relatively new phenomenon, and the staff of DEAs, including FINRA, now 
have substantial experience and familiarity with the topic.
    Finally, the amendments to both rules would remove or replace text 
to make them more technology neutral and to improve readability.

B. Legal Basis

    Pursuant to Exchange Act Section 17, 15 U.S.C. 78q the Commission 
is proposing to revise Sec.  240.17a-4(f) and (j) and Sec.  240.18a-
6(e) and (g) of title 17 of the Code of Federal Regulations.

C. Small Entities Subject to the Proposed Rules

    As discussed above, the Commission estimates that approximately 
3,551 broker-dealers and 25 SBSDs that are not broker-dealers would be 
subject to the new electronic recordkeeping requirements as a result of 
the amendments to Rules 17a-4(f) and (j) and to Rules 18a-6(e) and (g), 
respectively. For purposes of this Regulatory Flexibility Act (``RFA'') 
analysis, the Commission refers to broker-dealers that might be deemed 
small entities under the RFA as ``small entities.''
    Based on FOCUS Report data, the Commission estimates that as of 
June 30, 2021, approximately 1,439 of those broker-dealers might be 
deemed small entities for purposes of this analysis. Based upon the 
Commission's prior RFA certification that adoption of Rule 18a-6 would 
not have a significant economic impact on a substantial number of small 
entities for the purposes of the RFA,\195\ the Commission believes that 
no small entities will be affected by the proposed amendments to Rule 
18a-6.
---------------------------------------------------------------------------

    \195\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 
68645.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The RFA requires a description of the projected reporting, 
recordkeeping, and other compliance requirements of the proposed 
amendments to Rules 17a-4(f) and (j) and Rules 18a-6(e) and (g), 
including an estimate of the classes of small entities that would be 
subject to the requirements and the type of professional skill 
necessary to prepare required reports and records. Following is a 
discussion of the associated costs and burdens of compliance with the 
proposed amendments, as incurred by small entities.\196\
---------------------------------------------------------------------------

    \196\ See section V.D.1, above (describing costs for smaller 
broker-dealers, which could include broker-dealers that are small 
entities).
---------------------------------------------------------------------------

    The Commission does not believe that the compliance costs of the 
proposed amendments would be significant. The Commission believes that 
the proposed audit-trail alternative to preserving electronic records 
would be consistent with existing broker-dealer practices. Broker-
dealers have explained to the Commission that the electronic 
recordkeeping systems used for business purposes are dynamic and 
updated constantly (e.g., with each new transaction or position) and 
easily accessible for retrieving records. The Commission believes that 
these contemporary electronic recordkeeping business systems, in many 
cases, can be configured to meet the audit-trail requirement in Rule 
17a-4(f), as proposed to be amended. Moreover, small broker-dealers 
could continue to preserve records on electronic recordkeeping systems 
that meet the WORM requirement.
    The proposed replacement of the required third-party access and 
undertakings requirements in Rule 17a-4(f) with a requirement that a 
senior officer of the broker-dealer have the access and make the 
required undertakings should reduce the burden

[[Page 68325]]

on small broker-dealers because they will be able to use an internal 
resource at no marginal cost rather than an external source to comply 
with the requirement.
    The proposed amendments to Rule 17a-4(j) that would require a 
broker-dealer to furnish a record and its audit trail (if applicable) 
preserved on an electronic recordkeeping system pursuant Rule 17a-4(f) 
in a reasonably usable electronic format, if requested by a 
representative of the Commission, should not impose a burden on small 
entities.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission does not believe that the proposed amendments 
impacting smaller entities that are broker-dealers would duplicate, 
overlap, or conflict with other Federal Rules.

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives 
that would accomplish its stated objective, while minimizing any 
significant economic impact on small entities. The Commission 
considered the following alternatives for small entities in relation to 
our proposal: (1) Exempting broker-dealers that are small entities from 
the proposed requirements, to account for resources available to small 
entities; (2) establishing different requirements, including frequency, 
to account for resources available to small entities; (3) clarifying, 
consolidating, or simplifying the compliance requirements under the 
proposal for small entities; and (4) using performance rather than 
design standards.
    The Commission considered exempting broker-dealers that are small 
entities from the proposal and considered establishing different 
requirements for these firms.\197\ However, the Commission elected not 
to do so for a number of reasons, including: (1) The option for small 
entities to keep their records in paper or micrographic media, rather 
than electronically; (2) the importance of establishing requirements 
for reliable and secure electronic recordkeeping systems for broker-
dealers; (3) the availability of multiple third-party vendors to 
provide the electronic recordkeeping services; and (4) the ability of 
small entities to continue to use existing WORM-compliant electronic 
recordkeeping systems.
---------------------------------------------------------------------------

    \197\ As stated above, the Commission does not believe any SBS 
Entities qualify as ``small entities'' for the purposes of the RFA.
---------------------------------------------------------------------------

    In this vein, the Commission considered proposing the elimination 
of the WORM alternative and requiring all broker-dealers and nonbank 
SBS Entities to comply with an audit-trail requirement. This 
alternative would require all affected entities to modernize their 
recordkeeping systems to meet the audit-trail requirement. While this 
alternative could produce long-term compliance efficiencies for a 
greater number of affected participants, it would also require all 
affected entities with WORM-compliant systems to upgrade their 
electronic recordkeeping systems. The Commission elected not to propose 
this alternative given its preliminary belief that the accompanying 
compliance costs could be particularly burdensome for smaller entities 
and that the alternative could have a disproportionate effect on 
smaller and medium-sized broker-dealers.\198\
---------------------------------------------------------------------------

    \198\ See section IV.D. of this release (analyzing the potential 
costs of alternatives to the rule amendments the Commission is 
proposing).
---------------------------------------------------------------------------

    1. The Commission also considered simplifying compliance by 
proposing performance rather than design standards similar to the 
approach taken by the CFTC. The CFTC amended the electronic 
recordkeeping requirements by replacing prescriptive requirements for 
electronic recordkeeping systems with a principles-based approach.\199\ 
The Commission believes that its proposed rule amendments, establishing 
electronic recordkeeping requirements for broker-dealers should provide 
greater protection to the original records created and preserved by 
broker-dealers, thereby giving regulators more reliable and secure 
access to those records. Unlike the CFTC's rules, the Commission's 
proposal retains the WORM standard, which requires electronic records 
to be maintained exclusively in a non-rewriteable, non-erasable format. 
The audit-trail alternative would require that the electronic records 
be preserved in a manner that permits the recreation of an original 
record if it is altered, over-written, or erased. Moreover, the 
Commission believes that its proposal addresses the same concerns 
addressed in the CFTC proposal, namely the security and authenticity of 
and access to records.\200\ For these reasons, the Commission 
determined not to propose principles-based rules.
---------------------------------------------------------------------------

    \199\ See CFTC Electronic Recordkeeping Release, 82 FR at 24480.
    \200\ Compare Rule 17a-4(f), as proposed to be amended, and Rule 
18a-6(e), as proposed to be amended, with CFTC Section 1.31(d)(2).
---------------------------------------------------------------------------

G. Request for Comment

    The Commission encourages the submission of comments with respect 
to any aspect of this initial RFA analysis. In particular, the 
Commission requests comment regarding:
    1. Whether there are more efficient or less burdensome ways for the 
Commission to modernize the electronic recordkeeping requirements for 
registrants compared to what the Commission has proposed;
    2. The number of small entities that may be affected by the 
proposed rule amendments; and
    3. Whether there are any Federal rules that duplicate, overlap, or 
conflict with the proposed amendments.

VII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA,'') \201\ the Commission must advise the OMB as 
to whether the proposed regulation constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in:
---------------------------------------------------------------------------

    \201\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effect on competition, investment or 
innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed 
for 60 days pending Congressional review.
    The Commission requests comment on the potential impact of the 
amendments to Rules 17a-5(f) and (j) and Rules 18a-6(e) and (g) on:
    1. The U.S. economy on an annual basis,
    2. Any potential increase in costs or prices for consumers or 
individual industries, and
    3. Any potential effect on competition, investment, or innovation.
    Commenters are requested to provide empirical data and other 
factual support for their view to the extent possible.

VIII. Statutory Authority

    The Commission is revising Rules 17a-4 and 18a-6 under the Exchange 
Act (17 CFR 240.17a-4 and 17 CFR 240.18a-6) pursuant to the authority 
conferred by the Exchange Act, including Sections 15F and 17.

[[Page 68326]]

List of Subjects in 17 CFR Part 240

    Brokers, Confidential business information, Fraud, Reporting and 
recordkeeping requirements, Securities.

Text of Rule Amendments

    For the reasons set out in the preamble, the Commission is 
proposing to amend title 17, chapter II of the Code of Federal 
Regulations as follows:

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

0
1. The authority citation for part 240 continues to read, in part, as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.17a-4 also issued under secs. 2, 17, 23(a), 48 Stat. 
897, as amended; 15 U.S.C. 78a, 78d-1, 78d-2; sec. 14, Pub. L. 94-
29, 89 Stat. 137 (15 U.S.C. 78a); sec. 18, Pub. L. 94-29, 89 Stat. 
155 (15 U.S.C. 78w);
* * * * *
0
2. Amend Sec.  240.17a-4 by revising paragraphs (f) and (j) to read as 
follows:


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

* * * * *
    (f) The records required to be maintained and preserved pursuant to 
Sec. Sec.  240.17a-3 and 240.17a-4 may be immediately produced or 
reproduced by means of an electronic recordkeeping system or by means 
of micrographic media subject to the conditions set forth in this 
paragraph and be maintained and preserved for the required time in that 
form.
    (1) For purposes of this paragraph,
    (i) The term micrographic media means microfilm or microfiche, or 
any similar medium; and
    (ii) The term electronic recordkeeping system means a system that 
preserves records in a digital format and that requires a computer to 
access the records.
    (2) An electronic recordkeeping system must:
    (i)(A) Preserve the records for the duration of their applicable 
retention periods in a manner that maintains a complete time-stamped 
audit trail that includes:
    (1) All modifications to and deletions of a record or any part 
thereof;
    (2) The date and time of operator entries and actions that create, 
modify, or delete the record;
    (3) The individual(s) creating, modifying, or deleting the record; 
and
    (4) Any other information needed to maintain an audit trail of each 
distinct record in a way that maintains security, signatures, and data 
to ensure the authenticity and reliability of the record and will 
permit re-creation of the original record and interim iterations of the 
record; or
    (B) Preserve the records exclusively in a non-rewriteable, non-
erasable format;
    (ii) Verify automatically the completeness and accuracy of the 
processes for storing and retaining records electronically;
    (iii) If applicable, serialize the original and duplicate units of 
the storage media, and time-date for the required period of retention 
the information placed on such electronic storage media; and
    (iv) Have the capacity to readily download and transfer copies of a 
record and its audit trail (if applicable) in both a human readable 
format and in a reasonably usable electronic format and to readily 
download and transfer the information needed to locate the electronic 
record, as required by the staffs of the Commission, the self-
regulatory organizations of which the member, broker, or dealer is a 
member, or any State securities regulator having jurisdiction over the 
member, broker or dealer.
    (3) A member, broker, or dealer using an electronic recordkeeping 
system must:
    (i) At all times have available, for examination by the staffs of 
the Commission, the self-regulatory organizations of which the member, 
broker, or dealer is a member, or any State securities regulator having 
jurisdiction over the member, broker or dealer facilities for immediate 
production of records preserved by means of the electronic 
recordkeeping system and for producing copies of those records;
    (ii) Be ready at all times to provide, and immediately provide, any 
record or information needed to locate records stored by means of the 
electronic recordkeeping system that the staffs of the Commission, the 
self-regulatory organizations of which the member, broker, or dealer is 
a member, or any State securities regulator having jurisdiction over 
the member, broker or dealer may request;
    (iii) Maintain a backup electronic recordkeeping system that meets 
the other requirements of this paragraph (f) and that retains the 
records required to be maintained and preserved pursuant to Sec. Sec.  
240.17a-3 and 240.17a-4 in accordance with this section;
    (iv) Organize and maintain information necessary to locate records 
maintained by the electronic recordkeeping system;
    (v)(A) Have in place an auditable system of controls that records, 
among other things: (1) Each input, alteration, or deletion of a 
record;
    (2) The names of individuals inputting, altering, or deleting a 
record; and
    (3) The date and time such individuals input, altered, or deleted 
the record;
    (B) At all times be able to produce a record of the results of the 
audit of the system of controls for examination by the staffs of the 
Commission, the self-regulatory organizations of which the member, 
broker, or dealer is a member, or any State securities regulator having 
jurisdiction over the member, broker or dealer; and
    (C) Preserve the record of the results of the audit of the system 
of controls for the retention period required for the associated 
records;
    (vi) Maintain, keep current, and provide promptly upon request by 
the staffs of the Commission, the self-regulatory organizations of 
which the member, broker, or dealer is a member, or any State 
securities regulator having jurisdiction over the member, broker or 
dealer all information necessary to access and locate records preserved 
by means of the electronic recordkeeping system; and
    (vii) Have at all times a senior officer of the member, broker, or 
dealer (hereinafter, the ``undersigned''), who has independent access 
to and the ability to provide records maintained and preserved on the 
electronic recordkeeping system, file with the designated examining 
authority for the member, broker or dealer the following undertakings 
with respect to such records:

    The undersigned hereby undertakes to furnish promptly to the 
U.S. Securities and Exchange Commission (``Commission''), its 
designees or representatives, any self- regulatory organization of 
which [Name of the Member, Broker, or Dealer] is a member, or any 
State securities regulator having jurisdiction over [Name of the 
Member, Broker, or Dealer], upon reasonable request, such 
information as is deemed necessary by the staff of the Commission, 
any self-regulatory organization of which [Name of the Member, 
Broker, or Dealer] is a member, or any State securities regulator 
having jurisdiction over [Name of the Member, Broker, or Dealer], 
and to download copies of

[[Page 68327]]

a record and its audit trail (if applicable) preserved by means of 
an electronic recordkeeping system of [Name of the Member, Broker, 
or Dealer] into both a human readable format and a reasonably usable 
electronic format in the event of a failure on the part of [Name of 
the Member, Broker, or Dealer] to download a requested record or its 
audit trail (if applicable).
    Furthermore, the undersigned hereby undertakes to take 
reasonable steps to provide access to the information preserved by 
means of an electronic recordkeeping system of [Name of the Member, 
Broker, or Dealer], including, as appropriate, downloading any 
record required to be maintained and preserved by [Name of the 
Member, Broker, or Dealer] pursuant to Sec. Sec.  240.17a-3 and 
240.17a-4 in a format acceptable to the staff of the Commission, any 
self-regulatory organization of which [Name of the Member, Broker, 
or Dealer] is a member, or any State securities regulator having 
jurisdiction over [Name of the Member, Broker, or Dealer]. 
Specifically, the undersigned will take reasonable steps that, in 
the event of a failure on the part of [Name of the Member, Broker, 
or Dealer] to download the record into a human readable format or a 
reasonably usable electronic format and after reasonable notice to 
[Name of the Member, Broker, or Dealer], the undersigned will 
download the record into a human readable format or a reasonably 
usable electronic format at the request of the staff of the staffs 
of the Commission, any self-regulatory organization of which [Name 
of the Member, Broker, or Dealer] is a member, or any State 
securities regulator having jurisdiction over [Name of the Member, 
Broker, or Dealer].

    (4) A broker-dealer using a micrographic media system must:
    (i) At all times have available, for examination by the staffs of 
the Commission, self-regulatory organizations of which it is a member, 
and any State securities regulator having jurisdiction over the member, 
broker or dealer, facilities for immediate, easily readable projection 
or production of micrographic media and for producing easily readable 
images;
    (ii) Be ready at all times to provide, and immediately provide, any 
facsimile enlargement which the staffs of the Commission, any self-
regulatory organization of which it is a member, or any State 
securities regulator having jurisdiction over the member, broker or 
dealer may request;
    (iii) Store, separately from the original, a duplicate copy of the 
record stored on any medium acceptable under Sec.  240.17a-4 for the 
time required; and
    (iv) Organize and index accurately all information maintained on 
both original and duplicate storage media.
    (A) At all times, a member, broker, or dealer must be able to have 
such indexes available for examination by the staffs of the Commission, 
the self-regulatory organizations of which the broker or dealer is a 
member, and any State securities regulator having jurisdiction over the 
member, broker or dealer.
    (B) Each index must be duplicated and the duplicate copies must be 
stored separately from the original copy of each index.
    (C) Original and duplicate indexes must be preserved for the time 
required for the indexed records.
* * * * *
    (j) Every member, broker and dealer subject to this section must 
furnish promptly to a representative of the Commission legible, true, 
complete, and current copies of those records of the member, broker or 
dealer that are required to be preserved under this section, or any 
other records of the member, broker or dealer subject to examination 
under section 17(b) of the Act (15 U.S.C. 78q(b)) that are requested by 
the representative of the Commission. The member, broker, or dealer 
must furnish a record and its audit trail (if applicable) preserved on 
an electronic recordkeeping system pursuant to paragraph (f) of this 
section in a reasonably usable electronic format, if requested by a 
representative of the Commission.
* * * * *
0
3. Amend Sec.  240.18a-6 by revising paragraphs (e) and (g) to read as 
follows:


Sec.  240.18a-6  Records to be preserved by certain security-based swap 
dealers and major security-based swap participants.

* * * * *
    (e) The records required to be maintained and preserved pursuant to 
Sec. Sec.  240.18a-5 and 240.18a-6 may be immediately produced or 
reproduced by means of an electronic recordkeeping system subject to 
the conditions set forth in this paragraph and be maintained and 
preserved for the required time in that form.
    (1) For purposes of this paragraph, the term electronic 
recordkeeping system means a system that preserves records in a digital 
format and that requires a computer to access the records.
    (2) An electronic recordkeeping system of a security-based swap 
dealer or major security-based swap participant without a prudential 
regulator must:
    (i)(A) Preserve the records for the duration of their applicable 
retention periods in a manner that maintains a complete time-stamped 
audit trail that includes:
    (1) All modifications to and deletions of a record or any part 
thereof;
    (2) The date and time of operator entries and actions that create, 
modify, or delete the record;
    (3) The individual(s) creating, modifying, or deleting the record; 
and
    (4) Any other information needed to maintain an audit trail of each 
distinct record in a way that maintains security, signatures, and data 
to ensure the authenticity and reliability of the record and will 
permit re-creation of the original record and interim iterations of the 
record; or
    (B) Preserve the records exclusively in a non-rewriteable, non-
erasable format;
    (ii) Verify automatically the completeness and accuracy of the 
processes for storing and retaining records electronically;
    (iii) If applicable, serialize the original and duplicate units of 
the storage media, and time-date for the required period of retention 
the information placed on such electronic storage media; and
    (iv) Have the capacity to readily download and transfer copies of a 
record and its audit trail (if applicable) in both a human readable 
format and in a reasonably usable electronic format and to readily 
download and transfer the information needed to locate the electronic 
record, as required by the staffs of the Commission, or any State 
regulator having jurisdiction over the security-based swap dealer or 
major security-based swap participant.
    (3) A security-based swap dealer or major security-based swap 
participant using an electronic recordkeeping system must:
    (i) At all times have available, for examination by the staffs of 
the Commission or any State regulator having jurisdiction over the 
security-based swap dealer or major security-based swap participant, 
facilities for immediate production of records preserved by means of 
the electronic recordkeeping system and for producing copies of those 
records;
    (ii) Be ready at all times to provide, and immediately provide, any 
record or information needed to locate records stored by means of the 
electronic recordkeeping system that the staffs of the Commission or 
any State regulator having jurisdiction over the security-based swap 
dealer or major security-based swap participant may request;
    (iii) Maintain a backup electronic recordkeeping system that meets 
the other requirements of this paragraph (e), as applicable, and that 
retains the records required to be maintained and preserved pursuant to 
Sec. Sec.  240.18a-5 and 240.18a-6 in accordance with this section;

[[Page 68328]]

    (iv) Organize and maintain information necessary to locate records 
maintained by the electronic recordkeeping system; and
    (v)(A) Have in place an auditable system of controls that records, 
among other things: (1) Each input, alteration, or deletion of a 
record;
    (2) The names of individuals inputting, altering, or deleting a 
record; and
    (3) The date and time such individuals input, altered, or deleted 
the record;
    (B) At all times be able to produce a record of the results of the 
audit of the system of controls for examination by the staffs of the 
Commission or any State regulator having jurisdiction over the 
security-based swap dealer or major security-based swap participant; 
and
    (C) Preserve the record of the results of the audit of the system 
of controls for the retention period required for the associated 
records;
    (vi) Maintain, keep current, and provide promptly upon request by 
the staffs of the Commission or any State regulator having jurisdiction 
over the security-based swap dealer or major security-based swap 
participant all information necessary to access and locate records 
preserved by means of the electronic recordkeeping system; and
    (vii) Have at all times a senior officer of the security-based swap 
dealer or major security-based swap participant (hereinafter, the 
``undersigned''), who has independent access to and the ability to 
provide records maintained and preserved on the electronic 
recordkeeping system, file with the Commission the following 
undertakings with respect to such records:

    The undersigned hereby undertakes to furnish promptly to the 
U.S. Securities and Exchange Commission (``Commission'') and its 
designees or representatives, or any State securities regulator 
having jurisdiction over [Name of the Security-Based Swap Dealer or 
Major Security-Based Swap Participant], upon reasonable request, 
such information as is deemed necessary by the staff of the 
Commission or any State regulator having jurisdiction over [Name of 
the Security-Based Swap Dealer or Major Security-Based Swap 
Participant], to download copies of a record and its audit trail (if 
applicable) preserved by means of an electronic recordkeeping system 
of [Name of the Security-Based Swap Dealer or Major Security-Based 
Swap Participant] into both a human readable format and a reasonably 
usable electronic format in the event of a failure on the part of 
[Name of the Security-Based Swap Dealer or Major Security-Based Swap 
Participant] to download a requested record or its audit trail (if 
applicable).
    Furthermore, the undersigned hereby undertakes to take 
reasonable steps to provide access to the information preserved by 
means of an electronic recordkeeping system of [Name of the 
Security-Based Swap Dealer or Major Security-Based Swap 
Participant], including, as appropriate, downloading any record 
required to be maintained and preserved by [Name of the Security-
Based Swap Dealer or Major Security-Based Swap Participant] pursuant 
to Sec. Sec.  240.18a-5 and 240.18a-6 in a format acceptable to the 
staff of the Commission or any State regulator having jurisdiction 
over [Name of the Security-Based Swap Dealer or Major Security-Based 
Swap Participant]. Specifically, the undersigned will take 
reasonable steps that, in the event of a failure on the part of 
[Name of the Security-Based Swap Dealer or Major Security-Based Swap 
Participant] to download the record into a human readable format or 
a reasonably usable electronic format and after reasonable notice to 
[Name of the Security-Based Swap Dealer or Major Security-Based Swap 
Participant], the undersigned will download the record into a human 
readable format or a reasonably usable electronic format at the 
request of the staff of the Commission or any State regulator having 
jurisdiction [Name of the Security-Based Swap Dealer or Major 
Security-Based Swap Participant].

* * * * *
    (g) Every security-based swap dealer and major security-based swap 
participant subject to this section must furnish promptly to a 
representative of the Commission legible, true, complete, and current 
copies of those records of the security-based swap dealer or major 
security-based swap participant that are required to be preserved under 
this section, or any other records of the security-based swap dealer or 
major security-based swap participant subject to examination or 
required to be made or maintained pursuant to section 15F of the Act 
that are requested by a representative of the Commission. The security-
based swap dealer and major security-based swap participant must 
furnish a record and its audit trail (if applicable) preserved on an 
electronic recordkeeping system pursuant to paragraph (e) of this 
section in a reasonably usable electronic format, if requested by a 
representative of the Commission.
* * * * *

    By the Commission.

    Dated: November 18, 2021.
Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25840 Filed 11-30-21; 8:45 am]
BILLING CODE 8011-01-P

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