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lotter on DSK11XQN23PROD with PROPOSALS2

Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules dealers and nonbank SBS Entities currently pass on part or all of their recordkeeping costs to their customers and counterparties, some of the above cost savings may flow through to customers and counterparties of brokerdealers and nonbank SBS Entities in the form of lower costs or greater availability of services. The extent to which cost savings are passed along to customers and counterparties will depend on several factors, including the price elasticity of the demand for broker-dealer and nonbank SBS Entity services, the substitutability of brokerdealers and nonbank SBS Entities, concentration in the broker-dealer and nonbank SBS Entity industries due to economies of scale, heterogeneity of broker-dealer and nonbank SBS Entity services, and market segmentation, among others.
The proposal may also enhance Commission oversight of nonbank SBS
Entities and broker-dealers. To the degree that the proposal may lead broker-dealers and nonbank SBS
Entities to move to a single recordkeeping system for both business and regulatory purposes, and if affected entities direct compliance cost savings to investments in system improvements and maintenance, the reliability and efficiency of recordkeeping systems may increase. Moreover, the Commission preliminarily believes that the proposed audit-trail and WORM alternatives will provide flexibility for broker-dealers and nonbank SBS Entities, while still maintaining the essential ability of the Commission to access the entities records in the course of examinations or other activities.
The Commission preliminarily believes that some of the proposed amendments may provide compliance efficiencies. For example, the proposed amendments related to the verification of completeness and accuracy of the processes for retaining records electronically may introduce time efficiencies in achieving compliance when an original record is added to the electronic recordkeeping system.
Similarly, proposed amendments to provide additional specificity to the obligations relating to the auditable system of controls required by paragraph f3v and Rule 17a4 and Rule paragraph e3v of Rule 18a6
may introduce time and compliance efficiencies by lowering burdens on compliance professionals time. Further, the Commission preliminarily believes that the elimination of the notification and representation requirements from Rule 17a4f would alleviate some
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burden currently imposed on brokerdealers, as discussed below.143
In addition, the proposed elimination of the third-party access and undertakings requirements may benefit affected entities by reducing cybersecurity and trade-secret risks attendant to requiring a third party to fulfill these responsibilities. Similarly, the proposed elimination of the escrow account option may reduce cybersecurity risk attendant to having this information held by a third party in escrow.144
Certain of the proposed amendments may also incrementally improve regulatory oversight. For example, proposed amendments related to the ability to download and transfer records in human readable and reasonably usable electronic formats may facilitate more efficient Commission oversight as they would reduce the time costs of staff review of individual records as well as searching and sorting electronic records.
Further, the proposed amendments requiring that a senior officer provide required undertakings may provide the Commission with a means to obtain records if an affected entity refuses to produce them in the normal course, which may enhance the efficiency of Commission examinations and oversight.
C. Costs of the Proposed Amendments The proposed amendments are intended to modernize the Commissions recordkeeping requirements and to reduce recordkeeping duplication by affected entities. However, as referenced above, the Commission recognizes that some broker-dealers and nonbank SBS
Entities may bear costs from having to alter electronic recordkeeping systems currently used. Nonbank SBS Entities may, for example, need to alter electronic storage systems to comply with either the audit-trail or WORM
requirement. In addition, broker-dealers may need to build new or alter existing 143 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.
144 The Commission does not expect significant benefits or costs associated with certain other amendments contemplated in the proposal that the Commission believes are technical in nature. These amendments include simplification of the introductory text of paragraph f3 of Rule 17a4
and paragraph e3 of Rule 18a6; amendments to paragraphs f3i of Rule 17a4 and e3i of Rule 18a6 to replace terms tied to micrographic media and optical disk technology; amendments to better clarify paragraph f3ii of Rule 17a4 and paragraph e3ii of Rule 18a6; and amendments moving the requirements for broker-dealers using micrographic media to new paragraph f4 of Rule 17a4.

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electronic recordkeeping systems to the extent they would like to meet the audit-trail requirement. As noted below,145 based upon information provided to the Commission by the securities industry, the Commission estimates that the initial cost to build and implement a WORM-compliant electronic recordkeeping system for a large broker-dealer is $10 million, with an additional cost of $1.2 million annually to maintain the system,146 and the Commission believes that the SBS
Entities that would be affected by the proposed rule amendments are of large sizes comparable to the universe of broker-dealers that the rulemaking petitioners used to derive those estimates. In addition, based on feedback from the securities industry, the Commission believes that the initial cost to build and implement an electronic recordkeeping system that meets the audit-trail requirements and the ongoing cost to maintain the system would be substantially lower than the analogous costs that would be incurred with respect to a WORM-compliant system.147 In particular, the Commission estimates that the initial cost to build and implement an electronic recordkeeping system that meets the audit-trail requirement for a large broker-dealer or SBS Entity without a prudential regulator and that is not a broker-dealer is $1,000,000, with an additional cost of $120,000
annually to maintain the system.
There are 802 broker-dealers with assets greater than $10 million and four SBSDs that would be subject to paragraph e2 of Rule 18a6. The Commission anticipates that eliminating the application of paragraph e2 of Rule 18a6 to the 21 SBSDs that have a prudential regulator and are subject to Rule 18a6 would result in a decrease of 100 hours per firm on an annual basis, or 2,100 hours per year for all firms affected by the proposed amendment, for an ongoing cost savings of $663,000 per year for all affected firms.148
The Commission does not believe any broker-dealers or SBSDs will elect to build a WORM-compliant electronic recordkeeping system. Moreover, the Commission estimates that most of these firms have electronic recordkeeping 145 See section V.D. of this release discussing decreases and increases in costs and burdens relating to proposals for purposes of the Paperwork Reduction Act.
146 See 17a4f Rulemaking Petition Addendum at 45.
147 See e.g. Rule 17a4f Rulemaking Petition at 67.
148 2,100 hours $316 per hour at the compliance manager rate = $663,000.

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