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Proposed Rule2021-25840

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

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Published

December 1, 2021

Issuing agencies

Securities and Exchange Commission

Abstract

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").

Full Text

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<title>Federal Register, Volume 86 Issue 228 (Wednesday, December 1, 2021)</title>
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[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 [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[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

<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#e496918881c9878b8989818a9097a4978187ca838b92"><span class="__cf_email__" data-cfemail="394b4c555c145a5654545c574d4a794a5c5a175e564f">[email&#160;protected]</span></a>. Please include
File Number S7-19-21 on the subject line.

Paper Comments

<bullet> 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 (<a href="https://www.sec.gov/rules/proposed.shtml">https://www.sec.gov/rules/proposed.shtml</a>). 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
<a href="http://www.sec.gov">www.sec.gov</a> 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:

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Commission reference CFR citation
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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 <a href="https://www.sec.gov/rules/petitions/2017/petn4-713.pdf">https://www.sec.gov/rules/petitions/2017/petn4-713.pdf</a> (``Rule
17a-4(f) Rulemaking Petition''). An addendum to the Rule 17a-4(f)
Rulemaking Petition was filed on May 24, 2018, available at <a href="https://www.sec.gov/rules/petitions/2018/ptn4-713-addendum.pdf">https://www.sec.gov/rules/petitions/2018/ptn4-713-addendum.pdf</a> (``Rule 17a-
4(f) Rulemaking Petition Addendum''). Comments on the petition were
received and are available at <a href="https://www.sec.gov/comments/4-713/4-713.htm">https://www.sec.gov/comments/4-713/4-713.htm</a>.
\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\
---------------------------------------------------------------------------

\40\ See SBSD/MSBSP Recordkeeping Proposing Release, 79 FR at
25312.
\41\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at
68550.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

\45\ As discussed above, Rule 17a-4(f) was adopted in 1997.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

\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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

\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\
---------------------------------------------------------------------------

\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 <a href="https://www.sec.gov/files/formx-17a-5_2.pdf">https://www.sec.gov/files/formx-17a-5_2.pdf</a>) 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\
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\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 <a href="https://stats.bis.org/statx/srs/table/d5.2">https://stats.bis.org/statx/srs/table/d5.2</a> (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 <a href="https://stats.bis.org/statx/srs/table/d5.1">https://stats.bis.org/statx/srs/table/d5.1</a> (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.
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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\
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\132\ See Key Dates for Registration of Security-Based Swap
Dealers and Major Security-Based Swap Participants, available at:
<a href="https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants">https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants</a>.
\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: <a href="https://www.globalrelay.com/gr-services/archive">https://www.globalrelay.com/gr-services/archive</a>; Amazon,
Protecting data with Amazon S3 Object lock, available at: <a href="https://aws.amazon.com/blogs/storage/protecting-data-with-amazon-s3-object-lock/">https://aws.amazon.com/blogs/storage/protecting-data-with-amazon-s3-object-lock/</a>; Cohasset Associates, Compliance Assessment: Amazon Web
Services (AWS) Simple Storage Service (S3), available at: <a href="https://d1.awsstatic.com/r2018/b/S3-Object-Lock/Amazon-S3-Compliance-Assessment.pdf">https://d1.awsstatic.com/r2018/b/S3-Object-Lock/Amazon-S3-Compliance-Assessment.pdf</a>; Microsoft, Securities and Exchange Commission (SEC)
Rule 17a-4(f) United States, available at: <a href="https://docs.microsoft.com/en-us/compliance/regulatory/offering-sec-17a-4">https://docs.microsoft.com/en-us/compliance/regulatory/offering-sec-17a-4</a>.
\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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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\
---------------------------------------------------------------------------

\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\
---------------------------------------------------------------------------

\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\
---------------------------------------------------------------------------

\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\
---------------------------------------------------------------------------

\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: <a href="https://www.sec.gov/tm/List-of-SBS-Dealers-and-Major-SBS-Participants">https://www.sec.gov/tm/List-of-SBS-Dealers-and-Major-SBS-Participants</a>.
\178\ See Substituted Compliance Notices, available at: <a href="https://www.sec.gov/tm/Substituted-compliance-Notices">https://www.sec.gov/tm/Substituted-compliance-Notices</a>.
\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 requi

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