Last October, the SEC adopted amendments to Exchange Act Rule 17a-4 with respect to the electronic recordkeeping requirements for broker-dealers, security-based swap dealers, and major security-based swap participants. A useful SEC FAQ document can also be found here.
The amendments became effective January 3, 2023, and with a fast-approaching compliance date of May 3, 2023 we thought it would be useful to recap this important rule change.
The amendments adjusted the rule’s prior requirements regarding the maintenance and preservation of electronic records, the use of third-party recordkeeping services, and the prompt production of records.
The amendments
Rule 17a-4 currently requires a broker-dealer to maintain and preserve electronic records exclusively in non-rewriteable, non-erasable (WORM) format.
The amendments to Rule 17a-4 add an audit-trail alternative to the WORM requirement so broker-dealers can use another option to preserve records. Firms can now use an electronic recordkeeping system that meets WORM requirements or an audit-trail alternative.
Like the WORM-compliant system, the audit-trail alternative must be an electronic recordkeeping system that maintains and preserves electronic records in a manner that permits the recreation of an original record if it is modified or deleted.
Additionally, Rule 17a-4(f) currently requires a broker-dealer exclusively using electronic storage media for some or all of its record preservation to have a third party promptly furnish to the Commission and other regulators the information necessary to download records kept on the electronic storage media to any medium acceptable under Rule 17a-4.
The amendments enable the broker-dealer to designate an executive officer to execute the undertakings if the executive officer has access to and the ability to provide records maintained and preserved on the broker-dealer’s electronic recordkeeping system either directly or through a specialist who reports directly or indirectly to the executive officer.
Recordkeeping system
In addition, the designated executive officer may appoint up to two officers and three specialists to fulfill the designated executive officers’ responsibilities and assist them in fulfilling their obligations as set forth in the undertakings.
Two important addenda to the above: The SEC has replaced the term “electronic storage media” with electronic recordkeeping system in its amendments to the rule. An electronic recordkeeping system is defined as “a system that preserves the records in a digital format in a manner that permits the records to be viewed and downloaded.”
The amendments to Rule 17a-4 add an audit-trail alternative to the WORM requirement so broker-dealers can use another option to preserve records. Firms can now use an electronic recordkeeping system that meets WORM requirements or an audit-trail alternative.
As an alternative means for accomplishing electronic record storage, the amendments provide flexibility to the undertaking requirement for broker-dealers that use servers or other storage devices owned or operated by a third party (see Rule 17a-4(f) noted above) so they can remain in compliance.
The current rule requires a broker-dealer to notify its examining authority prior to employing electronic storage media, including a 90-day notice if the broker-dealer intends to employ electronic storage media other than optical disk technology.
Rule 17a-4(f)(2)(i) also requires a representation from the broker-dealer or the storage medium vendor or another third party with appropriate expertise that the selected electronic storage medium meets the conditions set forth in the rule.
The SEC’s amendments eliminate the notification and representation requirements from Rule 17a-4(f).
Another aspect of Rule 17a-4(f) has been revised to require any broker-dealer records required to be preserved under Rule 17a-4 to be furnished in a “reasonably usable electronic format” when requested by the SEC. And “Reasonably usable electronic format” has been defined as a “format that is compatible with commonly used systems for accessing and reading electronic records.”
Why it matters
Besides the fact that May 3 is right around the corner, the amendments must be read carefully because they offer new ways to satisfy existing recordkeeping requirements, spell out some undertakings related to the use of certain third parties, and offer clarifications of what is meant by electronic recordkeeping systems and reasonably usable electronic formats.
Like any other adjustments and clarifications to rules, these amendments should prompt firms to review their written supervisory procedures, assess their resources, and review their training to ensure the business is prepared to meet expectations and be prepared to explain how.