Statement on Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants

Thank you, Chair Gensler. I appreciate the staff’s presentation on the recommendation to finalize amendments to the Commission’s recordkeeping rules applicable to broker-dealers, security-based swap dealers, and major security-based swap participants.

On July 9, 1993, the Commission proposed amendments to its broker-dealer records preservation rule to allow such entities to employ optical storage technology to maintain records that were required to be retained.[1] Two notable features of this 1993 proposal were: (1) it took up less than four pages in the Federal Register; and (2) like today’s recommendation, the first name listed as a staff contact was Associate Director Michael Macchiaroli.

In 1997, when the Commission adopted these amendments to Rule 17a-4, it stated that its actions to require the use of write once, ready many, or WORM formats “reflect a recognition of technological developments that will provide economic as well as time-saving advantages for broker-dealers by expanding the scope of recordkeeping options.”[2] However, the “optical storage technology” addressed by that rulemaking, such as optical platters, CD-ROMs, and DVDs was already on the way to becoming outmoded.

Twenty-five years later, the Commission is finally addressing antiquated technology. I am pleased that the Commission is reviewing rules that are woefully in need of updating so that the rules achieve their intended purposes while being sensitive to their costs and benefits. In particular, the responsibility to preserve records is foundational not only to the Commission’s Exams and Enforcement programs, but also for regulated entities to efficiently run their businesses. The previous rules effectively required firms to keep two sets of records: one using outdated “WORM” technology solely for SEC purposes; and the other for their businesses. This approach to regulation is unproductive and costly.

I support the recommendation before us because it amends the existing rules in a manner that is technology-neutral and does not seek to entrench a specific format. While I am hopeful that today’s amendments achieve this important goal, I encourage the Commission not to wait twenty-five more years to revisit the rules if they do not.

As the Commission continues to consider how advances in technology might impact its regulations, we should be mindful of the potential benefits and risks. For example, technologies such as cloud storage and distributed ledger technology may make it easier and more efficient to maintain and preserve records.

The ease at which these technologies and other systems can record, preserve, and index large amounts of otherwise innocuous data on an automated basis, however, should be carefully evaluated. In this regard, I am concerned about overly intrusive surveillance that tracks employees’ every keystroke, constantly takes facial images and screen snapshots, and logs every turnstile entry and exit.[3] America has a long history of respecting privacy, and the need to regulate the conduct of the financial services industry should not override these long-established norms. While financial services firms may have business justifications for engaging in extensive surveillance practices, the notion of doing so for regulatory compliance at the behest of government regulators can be unsettling.[4]

As a regulatory body that has an obligation to act in the public interest, the Commission has a responsibility to monitor its rulebook to see what is working and what is outdated. Rulemaking must be conducted in a methodical and deliberative process, based on a thorough review of the costs and benefits, and meaningfully seek and consider public comment. In that respect, I believe that the administrative file for this proposal would have been improved had the Commission not provided a short comment period that began last year just before Thanksgiving and ended on January 3rd. This comment period occurred at the same time as several open or recently closed comment periods for other rulemakings. The rulemaking process should – as a matter of good government – seek robust engagement from the public. The Commission can and should do better.

I am also disappointed that the Commission did not consider a more rational compliance period for smaller broker-dealers. Six months is an extremely abbreviated time frame, particularly for smaller firms that are already facing substantially increased compliance burdens as a result of the Commission’s ambitious rulemaking agenda.

According to the data in the adopting release, 3,363 broker-dealers have total customer assets of less than $1 billion, which represents only 1.4% of overall assets. On the other hand, approximately $5.26 trillion, or 98.6% of total assets, are held at only 145 broker-dealers above that threshold.

Let’s face it – by not staggering the compliance date based on firm size and recognizing the disparate impact on small businesses, today’s action effectively favors Wall Street interests over Main Street brokers. Extending the compliance date for smaller broker-dealers, including the nearly 1,600 broker-dealers that have less than $1 million in assets, would have helped to alleviate burdens for these small businesses without affecting investor protection.[5]

Notwithstanding my concerns, on balance, I support today’s amendments as important updates that provide useful alternatives to WORM for records preservation. I thank the staff in the Divisions of Trading and Markets, and Economic and Risk Analysis as well as the Office of the General Counsel for their efforts.