Introduction

On October 12, 2022, the Securities and Exchange Commission (“Commission”) adopted amendments to the recordkeeping rules applicable to broker-dealers, security-based swap dealers (“SBSDs”), and major security-based swap participants (“MSBSPs”).[1] The amendments modified requirements regarding the maintenance and preservation of electronic records, the use of third-party recordkeeping services to hold records, and the prompt production of records. The Commission also designated broker-dealer examining authorities (“DEAs”) as Commission designees for purposes of certain provisions of the broker-dealer record maintenance and preservation rule.

Who is affected by the amendments?

Broker-dealers that elect to preserve their records electronically.

Which rules are affected by the amendments?

Paragraphs (f) and (j) of Rule 17a-4 under the Securities Exchange Act of 1934 (“Exchange Act”) set forth the electronic recordkeeping and prompt production of records requirements for broker-dealers, including broker-dealers also registered as SBSDs or MSBSPs.

Rule 17a-4(i) under the Exchange Act requires that a third party that prepares or maintains the records of a broker-dealer (including a broker-dealer also registered as an SBSD or MSBSP) file a written undertaking wherein the third party agrees, among other things, to permit the examination of the firm’s records by representatives or designees of the Commission and to promptly furnish to the Commission or its designee a copy of the records.

What specific changes were made?

1. Elimination of Notice and Representation Requirements from Rule 17a-4(f)

Prior to the amendments, Rule 17a-4 required a broker-dealer to notify its DEA (for most broker-dealers, the Financial Industry Regulatory Authority) before employing an electronic recordkeeping system. The amendments to the rule eliminated this requirement, so that it is no longer necessary for a broker-dealer to notify its DEA before employing an electronic recordkeeping system.

2. Technical Requirements for Electronic Recordkeeping Systems

Prior to the amendments, Rule 17a-4 required a broker-dealer that elects to maintain and preserve electronic records to do so exclusively in a non-rewriteable, non-erasable format (also known as a write once, read many (“WORM”) format). The amendments to Rule 17a-4 retained the WORM standard as an option for firms that wish to continue to use it. The amendments also added an audit-trail alternative to the WORM requirement. The audit-trail alternative requires that a broker-dealer use an electronic recordkeeping system that maintains and preserves electronic records in a manner that permits the recreation of an original record if it is modified or deleted. Under the amendments to Rule 17a-4, therefore, a broker-dealer that elects to use an electronic recordkeeping system will need to ensure that such electronic recordkeeping system meets either the audit-trail requirement or the WORM requirement.

In the adopting release, the Commission explained that the audit-trail alternative will permit many broker-dealers to leverage the electronic recordkeeping systems they use for business purposes to meet the record maintenance and preservation requirements of Rule 17a-4. To meet the audit-trail alternative requirement, the electronic recordkeeping system, whether an existing electronic recordkeeping system or a new one being used by a firm, must maintain and 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 actions that create, modify, or delete the record; (3) if applicable, the identity of the individual creating, modifying, or deleting the record; and (4) any other information needed to maintain an audit trail of the 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 if it is modified or deleted.

3. Requirements for Broker-Dealers Using Electronic Recordkeeping Systems (Access to the Records)

Prior to the amendments, Rule 17a-4 required a broker-dealer to engage a third party who had 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 was required to execute, and file with its DEA, written undertakings agreeing to, among other things, promptly furnish to the Commission and other securities regulators the information necessary to download records kept on the electronic storage media to any medium acceptable under Rule 17a-4.

The amendments to Rule 17a-4 modified the form of the undertakings to make them more technology neutral and to provide an alternative to engaging a third party to perform this function. Under the alternative, a broker-dealer can designate an executive officer to execute the undertakings if the executive officer has access to and the ability to provide records maintained and preserved on the broker-dealer’s electronic recordkeeping system either directly or through a specialist who reports directly or indirectly to the executive officer. Further, the executive officer can appoint in writing up to two employees who are direct or indirect reports to fulfill the executive officer’s obligations if the executive officer is unable to fulfill those obligations. The employees must have the same ability as the executive officer to independently access and provide the records either directly or through a specialist who reports directly or indirectly to them. In addition, the designated executive officer can appoint in writing up to three specialists to assist in fulfilling the executive officer’s obligations. Thus, under the amendments to Rule 17a-4, a broker-dealer that elects to use an electronic recordkeeping system must have either an executive officer or a third party provide the written undertakings.

4. Requirements for Certain Third Parties that Maintain Broker-Dealer Regulatory Records

Rule 17a-4 requires a third party who prepares or maintains the regulatory records of a broker-dealer (regardless of whether the records are in paper or electronic form) to file a written undertaking with the Commission signed by a duly authorized person. The undertaking must include a provision whereby the third party agrees, among other things, to permit examination of the records by representatives or designees of the Commission as well as to promptly furnish to the Commission or its designee true, correct, complete, and current hard copies of any or all or any part of such books and records.

Some broker-dealers maintain their electronic recordkeeping systems and associated electronic records on servers or other storage devices that are owned or operated by a third party (e.g., a cloud service provider) while the broker-dealer retains control of the electronic recordkeeping system and access to the electronic records preserved on the system. The Commission amended Rule 17a-4 to address this development in electronic recordkeeping practices. Under the amendments, the third party may provide an alternative undertaking (in lieu of the traditional undertaking) that is tailored to how certain recordkeeping services, including cloud service providers, hold electronic records for broker-dealers. The use of this alternative undertaking is subject to certain conditions, including that the records are maintained on an electronic recordkeeping system (e.g., the alternative undertaking is not available if the records are in paper form) and the broker-dealer has independent access to the records (meaning, among other things, the broker-dealer can access the records without the need of any intervention of the third party). It also cannot be used if the broker-dealer must rely on the third party to take an intervening step to make the records available to the broker-dealer (e.g., it cannot be used if the broker-dealer must ask the third party to transfer copies of the records to the broker-dealer or must ask the third party to first decrypt the records before they can be accessed).

In the alternative undertaking, which also must be filed with the Commission, the third party must, among other things, acknowledge that the records are the property of the broker-dealer and that the broker-dealer has represented to the third party that the broker-dealer: (1) is subject to rules of the Commission governing the maintenance and preservation of certain records; (2) has independent access to the records maintained by the third party; and (3) consents to the third party fulfilling the obligations set forth in the undertaking. Further, the third party must undertake to facilitate within its ability, and not impede or prevent, the examination, access, download, or transfer of the records by a representative or designee of the Commission as permitted under the law. The third party must also undertake to facilitate within its ability, and not impede or prevent, a trustee appointed under the Securities Investor Protection Act of 1970 to liquidate the broker-dealer in accessing, downloading, or transferring the records as permitted under the law.

5. Requirement to Produce Electronic Records in a Reasonably Usable Electronic Format

Rule 17a-4 requires a broker-dealer to furnish promptly to a representative of the Commission legible, true, complete, and current copies of the records required to be maintained and preserved under the rules and any other records subject to examination. The amendments to Rule 17a-4 require the broker-dealer to furnish a record and its audit trail (if applicable) preserved on an electronic recordkeeping system in a reasonably usable electronic format, if requested by a representative of the Commission. This means the record will need to be produced in an electronic format that is compatible with commonly used systems for accessing and reading electronic records.

6. Designation of Broker-Dealer Examining Authorities

The traditional undertaking set forth in Rule 17a-4(i) requires a third party who prepares

or maintains broker-dealer regulatory records to file a written undertaking with the Commission, signed by a duly authorized person, whereby the third party agrees, among other things, to permit examination of the records by representatives or designees of the Commission as well as to promptly furnish to the Commission or its designee true, correct, complete, and current hard copies of any or all or any part of such books and records. Further, the alternative undertaking also refers to designees of the Commission. Finally, under the adopted amendments, the provisions of Rule 17a-4(f) setting forth the undertakings required of the designated executive officer or designated third party also refer to designees of the Commission.

The broker-dealer examining authorities are examiners of broker-dealer compliance with the securities laws. Therefore, they play a critical role in supporting the Commission’s oversight of broker-dealers. The Commission stated that, for these reasons, the broker-dealer examining authorities should have the same level of access to a broker-dealer’s records as is afforded the Commission under Rules 17a‑4(f) and 17a-4(i). Consequently, the Commission designated in the adopting release a broker-dealer’s examining authorities as a Commission designee for the purposes of Rules 17a-4(f) and 17a-4(i).

Summary table

The following table summarizes the amendments to Rules 17a-4.

Effective and compliance dates

The effective date of the amendments was January 3, 2023. The compliance date is May 3, 2023.

Other resources

The adopting release can be found on the Commission’s website at:

https://www.sec.gov/rules/final/2022/34-96034.pdf.

The Commission has also issued Frequently Asked Questions Regarding Rule Amendments to Broker-Dealer, Security-Based Swap Dealer, and Major Security-Based Swap Participant Electronic Recordkeeping Requirements. These FAQs are available at:

https://www.sec.gov/tm/faq-rule-amendments-broker-dealer-security-based-swap.

Contacting the Commission

The Commission’s Division of Trading and Markets is available to assist small entities with questions regarding the electronic recordkeeping requirements for broker-dealers, SBSDs and MSBPs. Questions may be directed to the Division of Trading and Markets by email at tradingandmarkets@sec.gov or by telephone at (202) 551-5777.