SEC Updates Electronic Recordkeeping Requirements

The SEC amended its broker-dealer and security-based swap dealer electronic recordkeeping requirements, no longer requiring records to be kept in the "write one, read many" ("WORM") format in order to accommodate new technologies.

The amendments to SEA Rule 17a-4 ("Records to be preserved by certain exchange members, brokers and dealers") and Rule 18a-6 ("Records to be preserved by certain security-based swap dealers and major security-based swap participants") make the rules more technology-neutral. The amendments replace the WORM format with an "audit-trail alternative" that allows the recreation of an original record in the event that it is damaged, altered or erased. The new reporting format gives broker-dealers more flexibility to configure electronic recordkeeping systems in a way that more closely aligns with contemporary industry practices, while still safeguarding original copies of the records. The final rule also aligns the electronic recordkeeping requirements for broker-dealers and nonbank security-based swap dealers and majority security-based swap participants. The rule change also catches the SEC up with the CFTC, which did away with the WORM requirement in 2017.

In addition, the final rule:

• requires broker-dealers and nonbank SBSDs to maintain electronic records either in WORM, or in a system that meets the audit-trail alternative requirement;

• mandates 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

• requires 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.

SEC Chair Gary Gensler, SEC Commissioner Hester M. Peirce and SEC Commissioner Jaime Lizárraga all supported the final rule, saying that the updates were long overdue and that the final rule is a significant improvement over the old and outdated prior requirements. Ms. Peirce added that adopting the final rule is "an initial step toward a truly principles-based, technologically neutral future where our registrants are free to find the best solutions available to meet our regulatory requirements."