The Securities and Exchange Commission has passed new rules requiring detailed electronic recordkeeping, prompt production of records, and third-party recordkeeping service requirements applicable to broker-dealers, security-based swap dealers (SBSDs), and major security-based swap participants (MSBSPs). The SEC’s broker-dealer electronic recordkeeping rule currently requires firms to preserve electronic records exclusively in a non-rewriteable, non-erasable format, known as the write once, read many format. The new changes require an audit-trail alternative under which electronic records can be preserved in a manner that permits the recreation of an original record if it is altered, over-written, or erased. This requirement is expected to assure that the broker dealers can and will be held accountable for non-compliance with securities regulations. In addition, whistleblower insiders will likely have more access to information revealing fraud or reckless handling of client information.The audit-trail alternative is designed to provide broker-dealers with greater flexibility in configuring their electronic recordkeeping systems so they more closely align with current electronic recordkeeping practices while also protecting the authenticity and reliability of original records. The amendments apply the same requirements to nonbank SBSDs and MSBSPs
Among other things, to facilitate examinations and make them more efficient, they also require broker-dealers and all types of SBSDs and MSBSPs to produce electronic records to securities regulators in a reasonably usable electronic format. Historically, companies have sought to compartmentalize information of a sensitive nature as it may reveal violations or financial fraud. That kind of fraud is expected to be more difficult as it will also allow the SEC to investigate alleged wrongdoing mor efficiently, including in whistleblower cases within the SEC program.
They will become effective 60 days after publication in the Federal Register. The compliance dates for the new requirements will be six months after publication in the Federal Register in the case of broker-dealers and 12 months after publication in the Federal Register in the case of SBSDs and MSBSPs.
What’s Required
The amendments modify the rules to make them more technology neutral, including by:
● Adding an audit-trail alternative to the existing requirement that broker-dealers
preserve electronic records exclusively in a non-rewriteable, non-erasable format;
● Requiring that, to meet the audit-trail alternative, a broker-dealer’s electronic
recordkeeping system must preserve electronic records in a manner that permits
the recreation of an original record if it is altered, over-written, or erased;
● Requiring that nonbank SBSDs and MSBSPs preserve electronic records: (1) in a
manner that meets the audit-trail requirement; or (2) exclusively in a nonrewriteable, non-erasable format;
● Requiring that broker-dealers, SBSDs, and MSBSPs produce electronic records in
a reasonably usable electronic format to allow securities regulators to search and
sort information on the records;
● Adding to the existing requirement in the broker-dealer recordkeeping rule that the
firm hire a third party with the ability to access the firm’s electronic records that
undertakes to provide the records to securities regulators if the firm fails or is
unable to do so with an alternative that a designated executive officer of the firm
can undertake this responsibility;
● Adding a parallel third party or designated executive officer requirement to the
SBSD and MSBSP electronic recordkeeping requirements rule;
● Eliminating a requirement that a broker-dealer notify its designated examining
authority before employing an electronic recordkeeping system; and
● Adding an alternative approach to the undertaking that must be obtained from a
third party that holds electronic records for a broker-dealer, SBSD, or MSBSP to
accommodate the practice of using a recordkeeping service, including a cloud
service provider, for this purpose.
Jeffrey Newman is a whistleblower lawyer with the firm Jeff Newman Law and he can be reached at jeff@jeffnewmanlaw.com or at 978-880-4758
