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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules
systems that could meet the audit-trail requirement or that could be configured to meet that requirement without the need to build a new system. The Commission estimates that 20 of these firms would elect to build a new electronic recordkeeping system to meet the audit-trail requirement for an initial one-time industry cost burden of $20,000,000 and an annual cost burden of $2,400,000.
The Commission estimates that the cost for the 2,749 broker-dealers with $10,000,000 or less in total assets to build and maintain an electronic recordkeeping system that meets the proposed audit-trail requirement would be significantly less than the $1,000,000
initial and $120,000 annual costs estimated for the 802 larger brokerdealers and four SBSDs that would be subject to paragraph e2 of Rule 18a 6. Consequently, the Commission estimates that the initial cost to build and implement an electronic recordkeeping system that meets the audit-trail requirement for these smaller broker-dealers is $100,000, with an additional cost of $12,000 annually to maintain the system. The Commission estimates that most of the 2,749 brokerdealers with $10,000,000 or less in total assets will continue to preserve records in the manner they do today: Using a WORM-compliant system, using micrographic media, or maintaining paper records. The Commission estimates that 80 of these firms would elect to build a new electronic recordkeeping system to meet the audittrail requirement for an initial one-time industry cost burden of $8,000,000 and an annual cost burden of $960,000.
The Commission believes that brokerdealers and SBS Entities would incur an initial burden and ongoing annual burden in establishing a backup electronic recordkeeping system. The Commission believes these burdens and costs would be substantially less than the burdens and costs of the primary electronic recordkeeping systems because of the benefit of economies of scale for the backup system whereby common technology and personnel could be used for both systems. The Commission estimates that the costs and burdens for the 802 larger broker-dealers and four SBSDs that would be subject to paragraph e2 of Rule 18a6 would be $250,000 in initial burdens and costs and $30,000 in annual burdens and costs. Further, the Commission expects that the broker-dealers and SBS Entities that have electronic recordkeeping systems that could meet the audit-trail requirement or that could be configured to meet that requirement without the need to build a new system also
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maintain backup recordkeeping systems for business continuity purposes.
Therefore, the initial and annual costs would be incurred by the 20 firms that elect to build a new electronic recordkeeping system that meets the proposed audit-trail requirements.
Consequently, the Commission estimates that the industry-wide costs and burdens for these firms would be $5,000,000 in initial costs and burdens and $600,000 in annual costs and burdens.
The Commission estimates that the costs and burdens incurred by the 80
smaller broker-dealers that would build electronic recordkeeping systems to meet the audit-trail requirement and, therefore, need to build a backup recordkeeping system, would be substantially less than the costs and burdens incurred by the larger brokerdealers. The Commission estimates that these firms would incur an initial costs and burdens of $25,000 and ongoing annual costs and burdens of $3,000.
Therefore, the Commission estimates that the industry-wide costs and burdens for these firms would be $2,000,000 in initial costs and burdens and $240,000 in ongoing annual costs and burdens.
The Commission recognizes that the proposal would not harmonize with the parallel recordkeeping rule for CFTC
registrants e.g., futures commission merchants and swap dealers. In contrast, the proposal would impose a bright line audit-trail or WORM
requirement. To the degree that such requirements may not satisfy CFTC
requirements, a lack of harmonization in the recordkeeping requirement for registrants may give rise to compliance inefficiencies for broker dealers and SBS
Entities that are dually registered with the CFTC.
Certain other aspects of the proposed amendments may also impose costs on affected entities. Specifically, the proposed amendments related to human readable and reasonably usable electronic file formats may impose compliance costs related to the required updates to recordkeeping systems.149
Proposed amendments to third-party access and undertakings requirements may also impose additional time demands on senior officers, though these costs may be at least partially offset for broker-dealers by savings attendant to removing the requirement for third-party access. To the extent that these proposed requirements increase 149 See section V.D. of this release discussing increases and decreases in costs and burdens relating to proposals for purposes of the Paperwork Reduction Act.

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the scope of senior officer duties and increase potential liability on the part of senior officers, senior officers may demand higher compensation and liability insurance, which may result in an increase to senior officer recruitment and retention costs. Further, amendments requiring broker-dealers and SBS Entities to have a backup set of records when records are preserved on an electronic recordkeeping system may impose additional costs related to making updates to compliance systems, as compared to the current rules requirements to store separately from originals a duplicate copy of a record.150
D. Reasonable Alternatives The Commission has considered a number of alternatives. For example, the Commission has considered harmonizing the recordkeeping rules for SBS Entities with the CFTCs principlesbased approach applicable to Swap Entities, but retaining the proposed audit-trail requirement for brokerdealers. As another alternative, the Commission considered harmonizing recordkeeping rules for both brokerdealers and SBS Entities with the CFTCs principles-based approach.
These alternatives could enhance the cost savings from the proposal as affected entities may not need to modify their business recordkeeping systems to meet the proposed electronic recordkeeping system requirements, particularly with respect to nonbank SBS Entities that would need to use electronic recordkeeping systems that meet the WORM or audit-trail requirement. In addition, these alternatives could facilitate transactions across integrated swap and securitybased swap markets. The Commission believes that its proposed rule amendments establishing electronic recordkeeping requirements for SBS
Entities should provide greater protection to the original records created and preserved by SBS Entities, thereby giving regulators more reliable and secure access to those records.
Unlike the CFTCs 2017 amendment, the Commissions proposal retains the WORM standard as a compliance option; the standard requires electronic 150 The Commission does not expect significant costs associated with certain other amendments contemplated in the proposal, including amendments to eliminate the notification and representation requirements from Rule 17a4f;
amendments to eliminate the escrow account option from paragraph f3vi of Rule 17a4 and paragraph e3vi of Rule 18a6; and amendments to the requirements of paragraph f2iiB of Rule 17a4 and paragraph e2i of Rule 18a6 to provide additional specificity regarding the requirement that original records are completely and accurately captured.

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