Worms and Dinosaurs: Statement on the Proposed Amendments to Modernize How Broker-Dealers Preserve Electronic Records
Nov. 19, 2021
Technology changes faster than regulations do. An example of this phenomenon is the electronic recordkeeping rule for broker-dealers the Commission proposed to update this week. We proposed to amend the broker-dealer recordkeeping rules to eliminate the write-once/read-many (“WORM”) requirement that has proven outdated and unnecessarily burdensome for firms to implement and maintain. This rule, at twenty-five, is a dinosaur. WORM is intended to ensure that records are not altered or erased so that regulators have an accurate picture of firm’s activities. New technologies—if permitted—could give regulators even better insight into what firms do.
Technological change is a constant in our financial markets, and it generally redounds to the benefit of investors, firms, markets, and regulators. The firms serving investors leverage new technologies to provide cheaper, more efficient, and more user-friendly services and products. Firms use technology to monitor their own activities and to assist in regulatory oversight.
Regulators need to understand both the risks and benefits of new technology. We need to ensure that our regulatory framework is capable of accommodating technological change while continuing to advance the regulatory mandate that Congress has entrusted to us. Rules that, by text or interpretation, lock firms into using a specific technology well beyond that technology’s “sell-by” date or that unduly delay prudent adoption of new technologies should not stand.
In the quarter-century since the Commission adopted rules imposing the WORM requirement on broker-dealers, the information technology landscape has changed significantly. Indeed, it was apparent almost two decades ago that the rules, which mandate static recordkeeping, were unnecessarily restrictive. Broker-dealers increasingly use dynamically generated content to provide information to internal users and to their customers. Investors in an increasingly liquid market have come to expect real-time information about market prices and account balances. Broker-dealers cannot use static records for their own operational and compliance purposes, so 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.
I have enjoyed working with the staff on this issue over the past few years and appreciate the hard work and careful thought they put into crafting this proposal. I look forward to comments from the public. I particularly want to hear whether the system requirements that the proposed rule would impose are in fact technologically neutral. Will the proposed rule be sufficiently flexible to enable firms to incorporate new technological developments in the coming years? After all, we do not need any more WORMs or dinosaurs in our rulebook.
 The Commission also proposed to update electronic recordkeeping rules for security-based swap dealers and major security-based swap dealers.
 See Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants, Exchange Act Rel. No. 93614 (Nov. 18, 2021) available at https://www.sec.gov/rules/proposed/2021/34-93614.pdf.
 The current rule was originally proposed in 1993 and adopted in January 1997. See id. at 8 n.11.
 In 2003, the Commission issued an interpretation that was intended to ameliorate some of these concerns with the original rule. See Electronic Storage of Broker-Dealer Records, Exchange Act Release No. 47806 (May 7, 2003), 68 FR 25281, 25282 (May 12, 2003). These concerns persisted, however, leading several trade associations to file a petition for rulemaking in 2017. 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 https://www.sec.gov/rules/petitions/2017/petn4-713.pdf.