January 24, 2022

Volume XII, Number 24

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January 21, 2022

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SEC Proposes Amendments to Electronic Recordkeeping Requirements

The SEC proposed amendments to its broker-dealer and security-based swap dealer electronic recordkeeping requirements, most significantly to do away with the requirement that records be kept in a non-rewriteable, non-erasable format (better known as "write one, read many" or "WORM"). The SEC stated that it is proposing these amendments because the current version of its broker-dealer electronic recordkeeping rule, SEA Rule 17a-4 ("Records to be preserved by certain exchange members, brokers and dealers"), adopted in 1997, does not accommodate contemporary electronic recordkeeping systems.

The proposed amendments are intended to (i) make the rule "technology-neutral," such that it is compatible with future electronic recordkeeping innovations, (ii) improve electronic recordkeeping requirements and (iii) facilitate inspections and examinations. In place of the WORM requirement, the SEC would adopt an "audit-trail alternative," which would be defined as a recordkeeping system that records:

  • all modifications to and deletions of a record or any part thereof;

  • the date and time of operator entries and actions that create, modify, or delete the record;

  • the individual(s) creating, modifying, or deleting the record; and

  • 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.

In addition, the proposal would make, among things, the following modifications to the existing rules:

  • require broker-dealers and nonbank security-based swap dealers to maintain electronic records either in WORM or in a system that meets the audit-trail alternative requirement (the SBSD recordkeeping rule does not currently impose the WORM requirement and the new requirement would not apply to records created before the ultimate compliance date);

  • mandate that broker-dealers and SBSDs produce electronic records through a "reasonable usable" electronic method that enables securities regulators to search and sort through the information on the records; and

  • require that senior officers of a broker-dealer or SBSD have independent access to the firm's electronic records and provide such records to securities regulators. This last provision replaces the requirement (only applicable to broker-dealers) that a third party have access to the broker-dealer's records.

Comments on the proposal must be received within 30 days of its publication in the Federal Register.

SEC Chair Gary Gensler supported the rule proposal, stating that it would bring the SEC's regulation "in line with technological innovation." SEC Commissioner Hester Peirce also praised the issuance of the proposal, saying that an update of the electronic recordkeeping rule will reduce redundancy in firms' recordkeeping systems and will help the SEC ensure that its "regulatory framework is capable of accommodating technological change while continuing to advance the regulatory mandate that Congress has entrusted to [the SEC]."

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume XI, Number 323
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About this Author

Steven Lofchie, Cadwalader, financial services regulation attorney, derivatives market lawyer
Partner

Steven Lofchie, a partner in the Financial Services Group, concentrates his practice in advising financial institutions on regulatory issues and on derivatives and other financial instruments. He is consistently recognized in the United States by Chambers USA, Legal 500, and IFLR 1000 in the areas of financial services regulation and derivatives. The Best Lawyers in America also selected Steven as one of the nation's leading lawyers in several areas including: Administrative/Regulatory, Derivatives and Futures, Securities/Capital Markets, and...

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