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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Proposed Rules records to be maintained exclusively in a non-rewriteable, non-erasable format.
The audit-trail alternative would require that the electronic records be preserved in a manner that permits the recreation of an original record if it is altered, overwritten, or erased. Moreover, the Commission believes that its proposal addresses the same concerns addressed in the CFTC proposal, namely the security and authenticity of and access to records.151 Finally, the Commission preliminarily believes that the costs related to modification of existing business recordkeeping systems to meet the proposed electronic recordkeeping system requirements are likely to be low relative to the baseline ongoing costs of maintaining duplicative recordkeeping systems. Thus, the relative magnitude of this benefit of the alternative may be limited.
As another alternative, the Commission could require prudentially regulated SBS Entities to meet the proposed electronic recordkeeping system requirements. This alternative would expand the scope of application of the requirements, magnifying its benefits for Commission oversight as well as costs of altering existing recordkeeping systems. As a baseline matter, the Commission recognizes that prudentially regulated SBS Entities are subject to a robust system of recordkeeping requirements for different types of activities, including recordkeeping requirements under the Bank Secrecy Act regarding funds transfers equal to or greater than $3,000; 152 recordkeeping requirements regarding fiduciary accounts; 153
recordkeeping requirements for securities transactions; 154 and recordkeeping requirements for small business and farm loans, including a requirement to maintain the information in machine readable form.155
Importantly, as discussed above, the Commission preliminarily believes that the proposed rules requirements may conflict or overlap with the recordkeeping systems banks have implemented under regulations or guidance of the prudential regulators.
The Commission preliminarily believes that requiring prudentially regulated SBS Entities to meet the proposed electronic recordkeeping system requirements in addition to the recordkeeping requirements these 151 Compare Rule 17a5f3, as proposed to be amended and Rule 18a6e3, as proposed to be amended, with CFTC Section 1.31d2.
152 See, e.g., 31 CFR 1020.410.
153 See 12 CFR 9.8.
154 See 12 CFR 12.3.
155 See 12 CFR 25.42.

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entities are already subject to would not create significant incremental benefits.
As another alternative, the Commission could have proposed eliminating the WORM alternative and requiring all broker-dealers and nonbank SBS Entities to comply with an audit-trail requirement. This alternative would require all affected entities to modernize their recordkeeping systems to meet the audit-trail requirement.
While this alternative could produce long-term compliance efficiencies for a greater number of affected participants, it would also require all affected entities with WORM compliant systems to upgrade their electronic recordkeeping systems. Since compliance costs may be particularly burdensome for smaller entities, the alternative could have a disproportionate effect on smaller and medium-sized broker-dealers.
Finally, the Commission could have proposed requiring that a second senior officer has independent access to and the ability to provide the records and to execute the undertakings at all times. To the degree that relying on a single senior officer may present risks that the senior officer is unable or unwilling to obtain records, this alternative could increase the probability that the Commission would be able to access records. Thus, relative to the proposal, the alternative may further enhance the efficiency of Commission examinations and oversight. However, this alternative may impose additional time demands on a second senior officer in each affected entity. To the extent that the alternative would increase the scope of duties and increase potential liability on the part of a greater number of senior officers of affected entities, more senior officers may demand higher compensation and liability insurance, which may result in a greater increase to senior officer recruitment and retention costs relative to the proposal. Requiring a second individual to have the authority to grant access to the records may potentially increase cybersecurity risks compared to the proposed approach, although it would likely still represent less risk than the baseline third-party approach.
E. Effects on Efficiency, Competition, and Capital Formation The primary effect of the proposed amendments on efficiency would stem from increased efficiency of brokerdealer and SBS Entity recordkeeping.
Permitting either the audit-trail or WORM introduced in the optical disk era alternative is intended to allow broker-dealers and SBS Entities to modernize the records and systems such entities maintain for regulatory
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purposes. The Commission anticipates that most of the affected entities would respond to such a requirement by eliminating duplicative recordkeeping for regulatory and business purposes, giving rise to cost efficiencies discussed above. The proposal would not alter the amount, type, or manner of disclosures available to investors or the Commission, nor would it change broker-dealer or SBS Entity business models or activities. Thus, the Commission does not anticipate the proposal to impact informational or allocative efficiency.
The proposed amendments are not expected to significantly impact competition between bank and nonbank SBS Entities. As described above, the proposal would impose electronic recordkeeping system requirements including the audit-trail alternative on nonbank SBS Entities, but not on bank SBS Entities. Transitioning regulatory recordkeeping systems from hardware solutions such as optical disks meeting the WORM requirement to electronic records compliant with the audit-trail requirement may require costly modifications to existing recordkeeping systems of broker-dealers and nonbank SBS Entities may need to modify existing electronic recordkeeping systems to meet either the WORM or audit-trail requirement; bank SBS
Entities would not bear such costs.
To the extent that the proposal results in cost savings for broker-dealers and SBS Entities estimated above, affected entities may be able to allocate newly available capital into capital forming activities. However, it is not clear that affected entities would direct cost savings to expanding their financial intermediation business and given the magnitude of the cost savings estimated above, the capital formation effects of the proposal are likely limited.
Therefore, the proposal is also not expected to have significant effects on capital formation.
F. Request for Comment The Commission requests comment on all aspects of the economic analysis of the proposed amendments. To the extent possible, the Commission requests that commenters provide supporting data and analysis with respect to the benefits, costs, and effects on competition, efficiency, and capital formation of adopting the proposed amendments or any reasonable alternatives. In particular, the Commission asks commenters to consider the following questions:
1. What additional qualitative or quantitative information should the Commission consider as part of the
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