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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules
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discussed below.48 In particular, the proposal to amend the requirements for electronic recordkeeping systems in paragraph e2 of Rule 18a6 to add the audit-trail and WORM alternative requirements could impose requirements that conflict with regulations or guidance of the prudential regulators. Further, the recordkeeping requirements of Rules 18a5 and 18a6 applicable to bank SBS
Entities are more limited in scope because: 1 The Commissions authority under Section 15Ff1Bi of the Exchange Act is tied to activities related to the conduct of the firms business as an SBS Entity; 2 bank SBS Entities are subject to recordkeeping requirements applicable to banks with respect to their banking activities; and 3 the prudential regulatorsrather than the Commissionare responsible for capital, margin, and other prudential requirements applicable to bank SBS
Entities.49 For these reasons, the Commission preliminarily believes that it would be appropriate to not impose the requirements for electronic recordkeeping systems in paragraph e2 of Rule 18a6, as proposed to be amended, on bank SBS Entities, but continue to impose them, as proposed to be amended, on nonbank SBS Entities.
Paragraph f2iiA of Rule 17a4
sets forth the WORM requirement. The Commission is proposing to amend Rule 17a4f to add an audit-trail alternative to the WORM requirement for brokerdealers.50 In addition, the Commission is proposing to amend Rule 18a6e to require that the electronic recordkeeping systems of nonbank SBS
Entities must meet either the audit-trail requirement or the WORM
requirement.51 Unlike bank SBS
Entities, the Commission is responsible for promulgating capital and margin requirements for nonbank SBS Entities and overseeing their compliance with 48 Unlike Rules 17a3 and 17a4 which consolidate broker-dealer recordkeeping requirements, the recordkeeping requirements for banks are diffuse. See, e.g., 31 CFR 1020.410
recordkeeping requirements under the Bank Secrecy Act regarding funds transfers equal to or greater than $3,000; 12 CFR 9.8 recordkeeping requirements regarding fiduciary accounts; 12 CFR
12.3 recordkeeping requirements for securities transactions; 12 CFR 25.42 recordkeeping requirements for small business and farm loans, including requirement to maintain the information in machine readable form.
49 See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68552.
50 See paragraph f2iA of Rule 17a4, as proposed to be amended. As discussed above, the existing WORM requirement of Rule 17a4 would be set forth in paragraph f2iB of Rule 17a4, as proposed to be amended.
51 See paragraph e2iB of Rule 18a6, as proposed to be amended.

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those requirements.52 Given this broader regulatory responsibility over nonbank SBS Entities, the Commission preliminarily believes it would be appropriate to amend the existing requirements for electronic recordkeeping systems in Rule 18a6e to add the requirement that the systems must meet either the audit-trail or WORM requirement. As discussed below, a WORM-compliant electronic recordkeeping system may be preferable for certain types of records. Moreover, including this alternative in the proposed amendments to Rule 18a6e would provide nonbank SBS Entities the same two alternatives that brokerdealers would have under the proposed amendments to Rule 17a4f.
Under the proposed amendments to Rule 17a4f, broker-dealers would have an option to employ electronic recordkeeping systems that meet the audit-trail requirement as an alternative to the existing WORM requirement which requirement would be retained in the rule. Under the proposed amendments to Rule 18a6e, nonbank SBS Entities would need to employ electronic recordkeeping systems that meet either the proposed audit-trail requirement or the proposed WORM
requirement. Broker-dealers and nonbank SBS Entities would have the flexibility to preserve all of their electronic records either by 1
consistently using an electronic recordkeeping system that meets either the audit-trail requirement or the WORM requirement or 2 preserving some electronic records using an electronic recordkeeping system that meets the audit-trail requirement and preserving other electronic records using an electronic recordkeeping system that meets the WORM
requirement.53 In the case of both rules, the object of the proposal is to require broker-dealers and nonbank SBS
Entities to preserve electronic records in a manner that permits original records to be re-created if altered, over-written, or erased, or that prevents original records from being altered, over-written, or erased. The objective is to require 52 See 15 U.S.C. 78o10e1B. See also Capital, Margin, and Segregation Requirements for SecurityBased Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, Exchange Act Release No. 86175 Jun. 21, 2019, 84 FR 43872
Aug. 22, 2019 SBSD/MSBSP Capital, Margin, and Segregation Adopting Release Commission release adopting capital and margin requirements for nonbank SBS Entities.
53 As discussed in more detail below, brokerdealers and nonbank SBS Entities could for business reasons elect to use two recordkeeping systems if the proposals are adopted: One that complies with the audit-trail requirement and one that complies with the WORM requirement.

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these registrants to maintain and preserve electronic records in a manner that protects the authenticity and reliability of original records.
The audit-trail alternative would be designed to address concerns that the WORM requirement causes some firms to deploy an electronic recordkeeping system that serves no purpose other than to hold records in a manner that meets the Commissions regulatory requirements for electronic recordkeeping systems.54 In particular, following the publication of the Rule 17a4f Interpretation, third-party vendors developed software-based solutions designed to meet the WORM
requirement of Rule 17a4f. Some broker-dealers use these electronic storage solutions to meet the WORM
requirement. However, the records stored on these electronic recordkeeping systems are often retained in that particular format solely for the purpose of meeting the WORM requirement i.e., they are not the records and associated electronic recordkeeping systems the firms use for business purposes.
Broker-dealers have explained to Commission staff that the electronic recordkeeping systems used for business purposes are dynamic and updated constantly e.g., with each new transaction or position and easily accessible for retrieving records;
whereas the WORM-compliant electronic recordkeeping systems are more akin to static snapshots of the records at a point in time and less accessible.55 As a result, some brokerdealers currently use WORM-compliant electronic recordkeeping systems solely to meet the requirements of Rule 17a 4f. Broker-dealers retrieve records from their business-based electronic recordkeeping systems for their own purposes. In addition, the Commission understands that firms generally retrieve and produce records from their business-based electronic recordkeeping systems rather than from their WORMcompliant electronic recordkeeping systems in response to requests from securities regulators because these records are easier to retrieve.
Commission staff typically do not specifically request that records be produced from the WORM-compliant 54 See Rule 17a4f Rulemaking Petition at 4
Today, WORM systems are costly, outmoded, and inefficient storage containers used exclusively to meet the rules requirements..
55 See Rule 17a4f Rulemaking Petition at 4
Data stored in WORM is essentially a static snapshot of a record that is locked and secured from any manipulation or deletion, as opposed to a complete system that could be used to stand up a production system during or following a disaster event..

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