Update: On November 3, 2022, the SEC's adopting release was published in the Federal Register. The final rules will become effective January 3, 2023. However, the SEC is providing additional time for broker-dealers and SBS Entities to comply with the amended rules:

On October 12, 2022, the SEC adopted amendments to the electronic recordkeeping requirements for broker-dealers, security-based swap dealers (SBSDs), and major security-based swap participants (MSBSPs, and together with SBSDs, SBS Entities).

Exchange Act Rule 17a-4 provides the record preservation requirements applicable to broker-dealers, including broker-dealers that are SBS Entities. Exchange Act Rule 18a-6 sets forth the preservation requirements for SBS Entities that are not broker-dealers. The SEC has adopted amendments to both Rules 17a-4 and 18a-6 to, among other things:

The amendments will become effective 60 days after publication in the Federal Register. However, the SEC is providing additional time for broker-dealers and SBS Entities to comply with the amended rules:

The rule amendments are discussed in further detail below.

Current Rule 17a-4(f) provides that the records broker-dealers must preserve under Rules 17a-3 and 17a-4 may be produced or reproduced on "micrographic media" or by means of "electronic storage media." As defined in the current rule, any electronic storage media used by a broker-dealer must, among other things, meet the WORM requirement. Rule 18a-6(e) does not include the term "micrographic media" or the WORM requirement, instead referring to the use of an "electronic storage system."

The SEC is now amending Rule 17a-4 to make the rule more technology neutral and making conforming amendments to Rule 18a-6. Specifically, the SEC is:

Under the adopted audit-trail alternative, the electronic recordkeeping system will need to preserve records for the applicable retention period in a manner that maintains a complete time-stamped audit trail that includes:

For SBS Entities, the technical requirements for electronic recordkeeping systems in amended Rule 18a-6(e)(2) will only apply to non-bank SBS Entities.

The SEC also adopted amendments to Rules 17a-4(f)(3) and 18a-6(e)(3), which provide the requirements for broker-dealers and SBS Entities regarding their use of electronic recordkeeping systems. The rules are generally designed to ensure the staff of the SEC and other regulators can access and examine the records. The amendments are intended to make the rules more technology neutral and provide broker-dealers and SBS Entities with more flexibility. For example, the SEC is eliminating the requirement to index records for entities using electronic recordkeeping systems. Broker-dealers and SBS Entities will instead simply be required to organize, maintain, keep current, and provide promptly upon request all information necessary to access and locate records preserved by the electronic recordkeeping system.

In addition, the SEC is amending the third-party access and undertakings requirement in current Rule 17a-4(f)(3)(vii). The rule requires at least one third-party to undertake to provide the SEC and other regulators with access to records and information upon request in the event of the broker-dealer's failure to do so. This requirement was not included in Rule 18a-6 when it was adopted, but is now being added. The SEC originally proposed to require a senior officer to make the required undertakings. Instead, the SEC's final amendments will require both broker-dealers and SBS Entities to designate either an executive officer or independent third-party to make the required undertakings. The designated executive officer, as defined in the respective rules, must be a member of senior management with access to the entity's electronic records and the ability to provide records to FINRA (or in the case of SBS Entities, to the SEC). The designated executive officer will also be able to appoint up to two employees and three specialists to assist them in fulfilling the obligations in the undertakings.

Further, current Rules 17a-4(i) and 18a-6(f) require broker-dealers and SBS Entities to obtain an undertaking from any third-party service providers who maintain and preserve records on behalf of the broker-dealer and SBS Entity. However, this undertaking pre-dates and was not designed to address the use of cloud service providers. To make the rules more technology neutral, the SEC is adopting amendments to allow broker-dealers and SBS entities whose electronic recordkeeping systems utilize third-party cloud storage services to have their cloud service provider execute an alternative undertaking, provided certain conditions are met.

Current Rule 17a-4(f)(2)(i) requires broker-dealers to notify FINRA before employing electronic storage media, including a 90-day notice if it intends to use electronic storage media other than optical disk technology. Rule 17a-4 also currently requires broker-dealers to provide their own representation or one from a storage medium vendor or other third-party with appropriate expertise that the selected storage media meets the conditions of the rule.

The SEC is eliminating these requirements, as it believes they are no longer necessary. Rule 18a-6 does not include analogous requirements.

The SEC is also amending Rule 17a-4(j) and Rule 18a-6(g) to require broker-dealers and SBS Entities, respectively, to furnish any records and its audit trail, if applicable, preserved electronically under Rules 17a-4(f) or 18a-6(e), as applicable, in a reasonably usable electronic format, if requested by SEC staff. As with the amendments discussed above, a reasonably useable electronic format would be a format that is common and compatible with commonly used systems for accessing and reading electronic records.

For more information on the current electronic recordkeeping requirements of broker-dealers and SBS Entities, see Practice Notes, Broker-Dealer Recordkeeping: Electronic Storage Media and Practice Note, US Derivatives Regulation: SEC Recordkeeping, Reporting, and Notification Requirements for Security-Based Swaps: Recordkeeping and Preservation Requirements for SBSDs and MSBSPs.