Amendments to broker-dealers’ recordkeeping requirements designed to modernize the process in the light of technological change have been issued by the SEC. The amendments will also facilitate examinations of broker-dealers, security-based swap dealers (SBSDs), and major security-based swap participants (MSBSPs).
Market integrity
SEC chair Gary Gensler said: “Since the 1930s, recordkeeping obligations have been vital to maintain market integrity and the SEC’s work as the cop on the beat. Today’s rule amendments will facilitate the SEC’s ability to examine and inspect records consistent with modern technology. This will enhance the Commission’s ability to preserve market integrity and protect investors.”
Current SEC recordkeeping rules requires firms to preserve electronic records exclusively in a non-rewriteable, non-erasable format. The amendments provide an audit-trail alternative allowing records to be preserved in a way that permits the recreation of an original record if that record is altered, over-written or erased.
The SEC points out that the regulatory objective is to ensure the “authenticity and reliability” of records. And goes on to say that both the WORM and audit-trail alternatives are “more likely to achieve this objective” because each “sets forth a specific and testable outcome that the electronic recordkeeping system must achieve”.
Audit-trail alternative requirements
In order to comply with the requirements under the new rule an audit-trail recordkeeping system must be able to:
- preserve a record for the duration of the retention period; and
- maintain a complete time-stamped audit trail of the record that includes:
- all changes and deletions of part or of the record;
- the date and time of action that create, modify or delete the record;
- if applicable the identity of the individual creating, modifying or deleting the record; and
- any other information required to maintain an audit trail and permit the re-creation of the original record if it is modified or deleted.
The requirements are intended to cover both human-initiated and automated actions.
Rule 18a-6
The amendments to Rule 18a-6 mean that SBSDs and MSBSPs that do not have a prudential regulator must now maintain and preserve electronic records utilising a system that is either WORM compliant or meets the new audit-trail requirements. Up until now these entities were not subject to these recordkeeping requirements.
Greater flexibility
The change should allow broker-dealers greater flexibility in configuring electronic recordkeeping systems, enabling them to align more closely with current practices.
Broker dealers, SBSDs and MSBSPs will also need to produce electronic records for regulators “in a reasonably useable electronic format”.