On 18 November 2021, the Securities and Exchange Commission (“SEC”) published for comment proposed amendments to the broker-dealer recordkeeping rules with respect to the use of electronic storage. The principal change would be to eliminate the current requirement that electronic records of broker-dealers be stored solely in a “write once, read many” (WORM) format.

The electronic storage requirements for broker-dealers have not been amended for nearly 25 years. Currently, paragraph (f) of Rule 17a-4 (“Rule”) under the Securities Exchange Act of 1934 requires that broker-dealer electronic storage systems maintain required records in a WORM format. In addition, the Rule requires that a broker-dealer retain a third party who has both access and the ability to download information from the broker-dealer’s electronic storage media to any acceptable medium under the Rule, who must provide undertakings to download records and provide them to regulators on request. The purpose of these two requirements is to prevent broker-dealers from altering required records and to ensure that regulators can exercise their inspection powers and get access to records when needed.

The proposed amendments to Rule 17a-4 would provide an audit trail alternative to the current requirement that electronic records be preserved in a WORM format. The audit trail alternative would require that broker-dealers preserve electronic records in a manner that permits the re-creation of an original record if it is altered, over-written or erased. In addition to the elimination of WORM as the exclusive storage requirement, the proposed amendments would eliminate the requirements for notifications and third party undertakings with respect to electronic storage and replacing those provisions with a requirement that a senior officer of the broker-dealer take on this responsibility. Finally, the proposal would adopt similar requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants.

These are significant proposals that respond to long-standing concerns raised by regulated entities with respect to the difficulties encountered with meeting the WORM standard and the differences between SEC recordkeeping rules and similar CFTC requirements. Comments on the proposed amendments are due 30 days after publication in the Federal Register.

Author

Jennifer Connors is a partner in Baker McKenzie's Financial Regulation and Enforcement Practice Group. She represents broker-dealers, investment advisers, alternative trading systems (ATSs), private fund managers, financial technology (FinTech) companies and other market participants on securities law and market regulation matters. Jennifer has more than 20 years of experience in legal and compliance roles at both global financial services firms and innovative FinTech companies as both a general counsel and a chief compliance officer. In these roles, she developed comprehensive written supervisory procedures (WSPs) and training programs for brokerage personnel, and served as a key liaison with financial industry regulators. In addition, she has drafted and negotiated vendor agreements, technology license agreements and electronic-access and trading agreements within the context of a FinTech startup.

Author

Mark is a Senior Counsel in Baker and McKenzie's North American Financial Regulation and Enforcement Practice, which provides clients with a full range of regulatory and compliance advice and enforcement counseling. Previously, Mark has served as a Partner in another international law firm and as an Associate Director in the Securities and Exchange Commission's Division of Trading and Markets (formerly Market Regulation) and Office of Compliance Inspections and Examinations, where he was responsible for the inspection and oversight of the nation's stock and options markets and for nationwide coordination of the SEC's broker-dealer and transfer agent examination programs.