The Securities and Exchange Commission has issued proposed amendments to the electronic recordkeeping and prompt-production-of-records requirements applicable to broker-dealers, security-based swap dealers (SBSDs) and major security-based swap participants (MSBSPs).
The SEC’s current broker-dealer electronic recordkeeping rule, adopted in 1997, requires firms to preserve electronic records exclusively in a non-rewriteable, non-erasable format—otherwise known as “write once, read many.” The SEC is now proposing to add an audit-trail alternative. Under this alternative, electronic records could be preserved in a manner that permits the recreation of an original record if it is altered, overwritten or erased.
The SEC notes that because the existing requirement may not be compatible with modern electronic recordkeeping systems, the audit-trail alternative is intended to provide broker-dealers with greater flexibility in configuring their electronic recordkeeping systems, so they more closely align with current technologies and practices, while also protecting the authenticity of original records.
The proposed amendments would also require nonbank SBSDs and MSBSPs to preserve electronic records using either of the above alternatives that would be available to broker-dealers. In addition, broker-dealers and all types of SBSDs and MSBSPs would be required to produce electronic records to securities regulators in a reasonably usable electronic format. The SEC notes that this proposal is designed to facilitate and make examinations more efficient.
To address cybersecurity concerns, the SEC also is proposing to replace a requirement in the broker-dealer recordkeeping rule that a third party with the ability to access the firm’s electronic records must undertake to provide the records to securities regulators if the firm refuses to do so with a requirement that a senior officer undertake this responsibility.
According to an SEC fact sheet, the rules that are affected include:
- Exchange Act Rules 17a-4(f) and (j) that set forth the electronic recordkeeping and prompt production of records requirements for broker-dealers;
- Rules 18a-6(e) and (g) that set forth the electronic recordkeeping and prompt production of records requirements for SBSDs and MSBSPs; and
- the requirements in both sets of rules that apply to records that these registrants must preserve for specified periods of time (e.g., three or six years).
“A lot has changed with respect to database management, among other technologies, in the last 24 years,” SEC Chair Gary Gensler said in a statement. “This proposal would bring the Commission’s rule in line with technological innovation, and I am pleased to support it.”
Commissioner Hester Peirce observed that because broker-dealers cannot use static records for their own operational and compliance purposes, many firms have two systems. “Requiring broker-dealers to maintain a wholly separate, redundant, ossified recordkeeping system that can capture only static snapshots has provided questionable benefits at great cost,” she stated.
Peirce added that she is particularly interested in hearing whether the system requirements that the proposed rule would impose are in fact technologically neutral and whether they will be sufficiently flexible to enable firms to incorporate new technological developments in the coming years.
There will be a comment period of 30 days, following publication in the Federal Register.
