Oct. 12, 2022
Today, the Commission will consider whether to adopt final rule amendments to modernize the electronic recordkeeping requirements for intermediaries such as broker-dealers and security-based swap dealers. I am pleased to support these rule amendments because, if adopted, these updates would bring the Commission’s electronic recordkeeping requirements in line with technological innovation.
Since the 1930s, recordkeeping obligations have been vital to maintain market integrity and the Securities and Exchange Commission’s work as the cop on the beat. In 1997, to reflect technological innovations of the time, the Commission amended its recordkeeping requirements for brokers to allow the use of electronic recordkeeping. This long-ago adopted rule requires such recordkeeping in a non-rewriteable and non-erasable format, such as when stored to a CD-ROM.
Some of the public may have experience with such recordkeeping if, for instance, they ever burned a CD. You had to get the playlist just right, as the data later could not be modified, overwritten, or erased. In the case of electronic recordkeeping, this helped to ensure the reliability and preservation of original records. The data, thus, had a write-once/read-many format, also known as WORM.
This talk of burning a CD for your Walkman or car radio might give pause to members of the public born in this century. In the 25 years since we last updated these rules, technology has transformed, and not only in the sense that iTunes has shut down. You might say, as Shakespeare once did, that even a worm will turn. He had a different meaning in mind when he said it four centuries ago, but a quarter-century after 1997, I think it is time to turn the page on the SEC’s WORM-exclusive recordkeeping requirements as well.
In particular, today’s rule amendments would provide brokers with an alternative to WORM. To meet this audit-trail alternative, the broker’s electronic recordkeeping system must preserve electronic records such that an original record can be recreated even if it is modified or erased. Further, these requirements would for the first time apply to nonbank security-based swap dealers.
Today’s rule amendments would facilitate the SEC’s ability to examine and inspect records consistent with modern technology. These recordkeeping requirements also may reduce some firms’ compliance costs. For example, firms that already use audit-trail technology for their day-to-day records may now use that technology to comply with this rule, rather than feel on the “hook” to keep separate, WORM-compliant records.
The rule amendments also would add flexibility to current requirements for brokers regarding the designation of third parties to access the firm’s records and provide them to regulators if the firm fails to do so. Firms instead would be able to designate an executive officer to undertake this responsibility. In addition, the rule amendments add flexibility to address new technologies, such as the cloud, that firms use to store records.
Even a worm will turn. These rule amendments would account for innovation since the turn of the century. They would enhance the Commission’s ability to preserve market integrity. That helps protect investors.
I would like to thank the SEC staff involved in this proposal, particularly:
- Haoxiang Zhu, Andrea Orr, Yue Ding, Jennifer Colihan, Laura Compton, Mike Macchiaroli, Tom McGowan, Randall Roy, Ray Lombardo, Joe Levinson, and Tim Fox from the Division of Trading and Markets;
- Jessica Wachter, Juan Echeverri, Diana Knyazeva, and Robert Giouard from the Division of Economic and Risk Analysis;
- Stacey Bogert from the Division of Enforcement;
- Carrie O’Brien and Christine Sibille from the Division of Examinations; and
- Dan Berkovitz, Meridith Mitchell, Marie-Louise Huth, Robert Teply, Cynthia Ginsberg, and William Miller from the Office of the General Counsel.