SEC Proposes Changes to Electronic Record Keeping Requirements – Corporate / Commercial Law
United States: SEC Proposes Changes to Electronic Record Keeping Requirements
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The SEC has proposed changes to its electronic record keeping requirements for brokers and securities swap dealers, including removing the requirement that records be kept in a non-rewritable, non-erasable (better known under the name of “write one, read a lot” or “VER”). The SEC said it was proposing these changes because the current version of its rule for electronic record keeping of brokers, SEA Rule 17a-4 ( “Records to be preserved by certain exchange members, brokers and dealers”), adopted in 1997, does not adapt to contemporary electronic record-keeping systems.
The proposed changes aim to (i) make the rule “technologically neutral” so that it is compatible with future innovations in electronic recordkeeping, (ii) improve electronic recordkeeping requirements and ( iii) facilitate inspections and reviews. Instead of the WORM requirement, the SEC would adopt an “alternative to audit trail,” which would be defined as a record keeping system that records:
- all modifications and deletions of a recording or part of it;
- the date and time of entries and operator actions that create, modify or delete the record;
- the person (s) creating, modifying or deleting the record; and
- any other information necessary to maintain an audit trail of each separate recording in a manner that maintains security, signatures and data to ensure the authenticity and reliability of the recording and will allow the recreation of the original recording and intermediate iterations of the record.
In addition, the proposal would make, inter alia, the following changes to the existing rules:
- require brokers and traders in non-bank securities-based swaps to maintain electronic records either in WORM or in a system that meets the alternative audit trail requirement (the SBSD record retention rule no. ‘does not currently impose the WORM requirement and the new requirement would not apply to records created before the deadline for compliance);
- requiring brokers and SBSDs to produce electronic records using a “reasonably usable” electronic method that allows securities regulators to search and sort the information contained in the records; and
- require senior officers of a brokerage or SBSD to have independent access to the company’s electronic records and provide those records to securities regulators. This last provision replaces the requirement (applicable only to broker-dealers) that a third party have access to the records of the broker-dealer.
Comments on the proposal must be received within 30 days of publication in the Federal Register.
SEC Chairman Gary Gensler backed the proposed rule, saying it would align SEC regulation “in line with technological innovation.” SEC Commissioner Hester Peirce also welcomed the publication of the proposal, saying that an update to the electronic record keeping rule will reduce redundancy in companies’ record keeping systems and help the SEC to ensure that its “regulatory framework is able to adapt to technological change while continuing to advance the regulatory mandate that Congress has given to [the
Comment Steven Lofchie
Frequently, financial regulators describe their rule changes as “modernizing” or “reforming” existing rules without considering the substance of the rule change. Here it is a truly modernizing rule amendment.
While for brokers the rule changes liberalize by removing the third-party access requirement and providing an alternative to WORM, the proposal’s requirements would be new for non-bank SBSDs, which were not subject to any these two requirements.
There is no doubt that regulated entities will strongly support the availability of the WORM alternative. That said, given the importance of the technological details of the new requirements, companies should carefully consider the proposed changes and the SEC’s questions.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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