[Federal Register Volume 84, Number 241 (Monday, December 16, 2019)]
[Rules and Regulations]
[Pages 68550-68733]
[FR Doc No: 2019-20678]

Vol. 84

Monday,

No. 241

December 16, 2019

Part II

 Securities and Exchange Commission

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17 CFR Parts 200, 240, and 249

Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants, and Broker-Dealers;
Final Rule

Federal Register / Vol. 84 , No. 241 / Monday, December 16, 2019 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 240, and 249

[Release No. 34-87005; File No. S7-05-14]
RIN 3235-AL45

Recordkeeping and Reporting Requirements for Security-Based Swap
Dealers, Major Security-Based Swap Participants, and Broker-Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: In accordance with the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act''), the Securities and
Exchange Commission (``Commission''), pursuant to the Securities
Exchange Act of 1934 (``Exchange Act''), is adopting recordkeeping,
reporting, and notification requirements applicable to security-based
swap dealers (``SBSDs'') and major security-based swap participants
(``MSBSPs''), securities count requirements applicable to certain
SBSDs, and additional recordkeeping requirements applicable to broker-
dealers to account for their security-based swap and swap activities.
The Commission also is making substituted compliance available with
respect to recordkeeping, reporting, and notification requirements
under Section 15F of the Exchange Act and the rules thereunder.

DATES:
    Effective date: February 14, 2020.
    Compliance date: The compliance dates are discussed in section
III.B. of this release.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at<PHONE_NUMBER>; Thomas K. McGowan, Associate Director, at
(202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202)
551-5522; Joseph I. Levinson, Senior Special Counsel, at (202) 551-
5598; Raymond A. Lombardo, Assistant Director, at<PHONE_NUMBER>;
Timothy C. Fox, Branch Chief, at<PHONE_NUMBER>; Valentina Minak Deng,
Special Counsel, at<PHONE_NUMBER>; Rose Russo Wells, Special Counsel,
at<PHONE_NUMBER>; or Abraham Jacob, Special Counsel, at (202) 551-
5583; Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Final Rules and Rule Amendments
    A. Recordkeeping
    1. Introduction
    2. Records To Be Made and Kept Current
    3. Record Maintenance and Preservation Requirements
    B. Reporting
    1. Introduction
    2. Periodic Filing of FOCUS Report
    3. Filing of Annual Audited Financial Reports and Other Reports
    C. Notification
    1. Introduction
    2. Amendments to Rule 17a-11 and New Rule 18a-8
    3. Additional Amendments to Rule 17a-11 and Modifications to
Rule 18a-8
    D. Quarterly Securities Count and Capital Charge for Unresolved
Securities Differences
    1. Introduction
    2. Rule 18a-9
    E. Alternative Compliance Mechanisms
    1. Limited Alternative Compliance Mechanism--Rules 17a-3 and
18a-5
    2. Full Alternative Compliance Mechanism--Rule 18a-10
    F. Cross-Border Application and Availability of Substituted
Compliance
    1. Cross-Border Application of Recordkeeping and Reporting
Requirements
    2. Availability of Substituted Compliance in Connection With
Recordkeeping and Reporting Requirements
    G. Amendments to Rule 18a-1
    H. Delegation of Authority
III. Explanation of Dates
    A. Effective Date
    B. Compliance Date
    C. Effect on Existing Commission Exemptive Relief
    D. Application to Substituted Compliance
IV. Paperwork Reduction Act
    A. Summary of Collections of Information Under the Rule
Amendments and New Rules
    1. Amendments to Rule 17a-3 and New Rule 18a-5
    2. Amendments to Rule 17a-4 and New Rule 18a-6
    3. Amendments to Rule 17a-5 and New Rule 18a-7
    4. Amendments to Rule 17a-11 and New Rule 18a-8
    5. Amendments to Rule 17a-12
    6. New Rule 18a-9
    7. Amendments to Rule 18a-10
    8. Amendments to Rule 3a71-6
    B. Use of Information
    C. Respondents
    D. Total Initial and Annual Recordkeeping and Reporting Burden
    1. Amendments to Rule 17a-3 and New Rule 18a-5
    2. Amendments to Rule 17a-4 and New Rule 18a-6
    3. Amendments to Rule 17a-5 and New Rule 18a-7
    4. Amendments to Rule 17a-11 and New Rule 18a-8
    5. Amendments to Rule 17a-12
    6. New Rule 18a-9
    7. Amendments to Rule 18a-10
    8. Amendments to Rule 3a71-6
    E. Collection of Information Is Mandatory
    F. Confidentiality
    G. Retention Period for Recordkeeping Requirements
V. Economic Analysis
    A. Introduction
    B. Baseline of Economic Analysis
    1. Available Data From the Security-Based Swap Market
    2. Security-Based Swap Market: Market Participants and Activity
    3. Existing Regulation of OTC Derivatives Market Participants
and Broker-Dealers
    C. Analysis of the Adopted Program and Alternatives
    1. Benefits of Recordkeeping, Reporting, Notification, and
Securities Count Requirements
    2. Costs of the Recordkeeping, Reporting, Notification, and
Securities Count Requirements
    3. Economic Effects of the Approach to Recordkeeping, Reporting,
Notification, and Securities Count Requirements
    4. Cross-Border Application and Substituted Compliance
    D. Impact on Efficiency, Competition, and Capital Formation
    E. Alternatives to the Adopted Recordkeeping, Reporting,
Notification, and Securities Count Rules
VI. Other Matters
VII. Regulatory Flexibility Act Certification
VIII. Statutory Basis

I. Background

    Title VII of the Dodd-Frank Act (``Title VII'') established a new
regulatory framework for the U.S. over-the-counter (``OTC'')
derivatives markets.\1\ Section 764 of the Dodd-Frank Act added Section
15F to the Exchange Act.\2\ Section 15F(f)(2) provides that the
Commission shall adopt rules governing reporting and recordkeeping for
SBSDs and MSBSPs. Section 15F(f)(1)(A)

provides that SBSDs and MSBSPs shall make such reports as are required
by the Commission, by rule or regulation, regarding the transactions
and positions and financial condition of the SBSD or MSBSP. Section
15F(f)(1)(B)(ii) provides that SBSDs and MSBSPs without a prudential
regulator \3\ (respectively, ``nonbank SBSDs'' and ``nonbank MSBSPs'')
shall keep books and records in such form and manner and for such
period as may be prescribed by the Commission by rule or regulation.\4\
Section 15F(f)(1)(B)(i) provides that SBSDs and MSBSPs for which there
is a prudential regulator (respectively, ``bank SBSDs'' and ``bank
MSBSPs'') shall keep books and records of all activities related to
their business as an SBSD or MSBSP in such form and manner and for such
period as may be prescribed by the Commission by rule or regulation.
Section 15F(g) of the Exchange Act requires SBSDs and MSBSPs to
maintain daily trading records with respect to security-based swaps and
provides that the Commission shall adopt rules governing daily trading
records for SBSDs and MSBSPs. Finally, Section 15F(i)(2) of the
Exchange Act provides that the Commission shall adopt rules governing
documentation standards for SBSDs and MSBSPs.
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    \1\ See Public Law 111-203, 701 through 774. The Dodd-Frank Act
assigns primary responsibility for the oversight of the U.S. OTC
derivatives markets to the Commission and the Commodity Futures
Trading Commission (``CFTC''). The Commission has oversight
authority with respect to a ``security-based swap'' as defined in
Section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)),
including to implement a registration and oversight program for a
``security-based swap dealer'' as defined in Section 3(a)(71) and a
``major security-based swap participant'' as defined in Section
3(a)(67). The CFTC has oversight authority with respect to a
``swap'' as defined in Section 1(a)(47) of the Commodity Exchange
Act (``CEA'') (7 U.S.C. 1(a)(47)), including to implement a
registration and oversight program for a ``swap dealer'' as defined
in Section 1(a)(49) of the CEA (7 U.S.C. 1(a)(49)) and a ``major
swap participant'' as defined in Section 1(a)(33) of the CEA (7
U.S.C. 1(a)(33)). The Commission and the CFTC jointly have adopted
rules to further define these terms See Further Definition of
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap
Agreement;'' Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR
48208 (Aug. 13, 2012); Further Definition of ``Swap Dealer,''
``Security-Based Swap Dealer,'' ``Major Swap Participant,'' ``Major
Security-Based Swap Participant'' and ``Eligible Contract
Participant,'' Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR
30596 (May 23, 2012).
    \2\ 15 U.S.C. 78o-10 (``Section 15F of the Exchange Act'' or
``Section 15F'').
    \3\ The term ``prudential regulator'' is defined in Section
1(a)(39) of the CEA (7 U.S.C. 1(a)(39)) and that definition is
incorporated by reference in Section 3(a)(74) of the Exchange Act.
Pursuant to the definition, the Board of Governors of the Federal
Reserve System (``Federal Reserve''), the Office of the Comptroller
of the Currency (``OCC''), the Federal Deposit Insurance Corporation
(``FDIC''), the Farm Credit Administration, or the Federal Housing
Finance Agency (collectively, the ``prudential regulators'') is the
``prudential regulator'' of an SBSD, MSBSP, swap dealer, or major
swap participant if the entity is directly supervised by that
agency.
    \4\ A nonbank SBSD or MSBSP could be dually registered with the
Commission as a broker-dealer (respectively, a ``broker-dealer
SBSD'' or ``broker-dealer MSBSP'') or registered with the Commission
only as an SBSD or MSBSP (respectively, a ``stand-alone SBSD'' or
``stand-alone MSBSP''). Any of these registrants or a bank SBSD or
bank MSBSP also could register with the CFTC as a futures commission
merchant (``FCM''), swap dealer, or major swap participant.
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    Section 17(a)(1) of the Exchange Act provides the Commission with
authority to adopt rules requiring broker-dealers--which would include
broker-dealer SBSDs and MSBSPs--to make and keep for prescribed periods
such records, furnish such copies thereof, and make and disseminate
such reports as the Commission, by rule, prescribes as necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Exchange Act.\5\ The
Commission anticipates that a number of broker-dealers will register as
SBSDs.\6\ The Commission expects that some broker-dealers that are not
registered as SBSDs or MSBSPs (``stand-alone broker-dealers'')
nonetheless will engage in security-based swap and swap activities.\7\
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    \5\ See 15 U.S.C. 78q(a)(1) (``Section 17 of the Exchange Act''
or ``Section 17''). Section 771 of the Dodd-Frank Act states that
unless otherwise provided by its terms, Subtitle B of Title VII
(relating to the regulation of the security-based swap markets) does
not divest any appropriate Federal banking agency, the Commission,
the CFTC, or any other Federal or State agency, of any authority
derived from any other provision of applicable law.
    \6\ While it is anticipated that some broker-dealers and banks
will register as SBSDs in order to engage in security-based swap
activities, it is unclear whether broker-dealers or banks will
register as MSBSPs.
    \7\ In this release, the term ``broker-dealer'' includes an OTC
derivatives dealer unless otherwise noted. See 17 CFR 240.3b-12
(defining the term ``OTC derivatives dealer''). Consequently, the
terms ``stand-alone broker-dealer,'' ``broker-dealer SBSD,'' and
``broker-dealer MSBSP'' include entities that are OTC derivatives
dealers unless otherwise noted.
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    In April 2014, the Commission proposed recordkeeping, reporting,
and notification requirements applicable to SBSDs and MSBSPs,
securities count requirements applicable to certain SBSDs, and
additional recordkeeping requirements applicable to broker-dealers to
account for their security-based swap and swap activities.\8\ The
proposed requirements were modeled on existing broker-dealer
requirements.\9\ The Commission received a number of comments in
response to these proposals.\10\ Separately, the Commission proposed
rules governing the cross-border treatment of recordkeeping and
reporting requirements with respect to SBSDs and MSBSPs.\11\ The
Commission received comments in response to these cross-border
proposals as well.\12\ The Commission carefully considered the comments
received on the proposals described above and, as discussed below, made
modifications in light of the comments in crafting final rules and
amendments.
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    \8\ See Recordkeeping and Reporting Proposing Release; Capital
Rule for Certain Security-Based Swap Dealers, Exchange Act Release
No. 71958 (Apr. 17, 2014), 79 FR 25194 (May 2, 2014)
(``Recordkeeping and Reporting Proposing Release'').
    \9\ See id. at 25196-97 (providing the rationale for modeling
the proposed requirements on the relevant broker-dealer
requirements).
    \10\ The comment letters are available at https://www.sec.gov/comments/s7-05-14/s70514.shtml.
    \11\ See Cross-Border Security-Based Swap Activities; Re-
Proposal of Regulation SBSR and Certain Rules and Forms Relating to
the Registration of Security-Based Swap Dealers and Major Security-
Based Swap Participants, Exchange Act Release No. 69490 (May 1,
2013), 78 FR 30968 (May 23, 2013) (``Cross-Border Proposing
Release'').
    \12\ The comment letters are available at https://www.sec.gov/comments/s7-02-13/s70213.shtml.
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    In this document, the Commission is amending certain existing rules
and adopting new rules. In particular, the Commission is amending
existing rules 17 CFR 240.17a-3 (``Rule 17a-3''), 17 CFR 240.17a-4
(``Rule 17a-4''), 17 CFR 240.17a-5 (``Rule 17a-5''), and 17 CFR
240.17a-11 (``Rule 17a-11''), and adopting new rules 17 CFR 240.18a-5
(``Rule 18a-5''), 17 CFR 240.18a-6 (``Rule 18a-6''), 17 CFR 240.18a-7
(``Rule 18a-7''), 17 CFR 240.18a-8 (``Rule 18a-8''), and 17 CFR
240.18a-9 (``Rule 18a-9''). The amendments and new rules establish
recordkeeping, reporting, and notification requirements for SBSDs and
MSBSPs and securities count requirements for stand-alone SBSDs
(collectively ``recordkeeping and reporting requirements''). The
amendments to Rules 17a-3 and 17a-4 also establish additional
recordkeeping requirements applicable to stand-alone broker-dealers to
the extent they engage in security-based swap or swap activities. The
Commission also is adopting largely technical amendments to Rules 17a-
3, 17a-4, 17a-5, and 17a-11 as well as a conforming amendment to
existing rule 17 CFR 240.17a-12 (``Rule 17a-12'').\13\ Further, the
Commission is adopting amendments to Parts II and III of the Financial
and Operational Combined Uniform Single Report (``FOCUS Report''),\14\
and adopting Part IIC of the FOCUS Report. Part II of the FOCUS Report,
as amended, and Part IIC of the FOCUS Report, as adopted, will be used
by registrants to report financial and operational information. Part
III of the FOCUS Report will accompany the annual reports that certain
of the registrants will file. The Commission also is amending existing
rule 17 CFR 240.3a71-6 (``Rule 3a71-6'') with respect to the cross-
border application of the recordkeeping and reporting rules and the
availability of substituted compliance.
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    \13\ The amendments to Rule 17a-12 replace the phrase ``Part
IIB'' with the phrase ``Part II'' each time it appears in the rule,
thereby requiring OTC derivatives dealers to file FOCUS Report Part
II, as amended, instead of FOCUS Report Part IIB.
    \14\ The FOCUS Report is also known as Form X-17A-5.
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    On June 21, 2019, the Commission adopted, among other requirements,
capital and margin requirements for nonbank SBSDs and MSBSPs and
segregation requirements for SBSDs.\15\

As discussed below, these capital, margin, and segregation requirements
are integrated into the recordkeeping and reporting requirements being
adopted in this document. Moreover, at the same time that the
Commission adopted the capital, margin, and segregation requirements,
the Commission adopted an alternative compliance mechanism (17 CFR
240.18a-10 ``Rule 18a-10'').\16\ The Commission is amending Rule 18a-10
in this document to incorporate recordkeeping and reporting
requirements into its provisions. The Commission also is amending an
SBSD capital rule (17 CFR 240.18a-1 ``Rule 18a-1'').
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    \15\ See Capital, Margin, and Segregation Requirements for
Security-Based 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) (``Capital, Margin, and Segregation Adopting
Release'').
    \16\ See Capital, Margin, and Segregation Adopting Release at
43943-46.
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    The Commission staff consulted with staff from the prudential
regulators and the CFTC in drafting these final rules and
amendments.\17\ In addition, relevant CFTC rules were considered as
part of this rulemaking effort.\18\
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    \17\ See Section 712(a)(2) of the Dodd-Frank Act.
    \18\ The CFTC has adopted recordkeeping and reporting rules for
swap dealers and major swap participants. See Swap Dealer and Major
Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures
Commission Merchant and Introducing Broker Conflicts of Interest
Rules; and Chief Compliance Officer Rules for Swap Dealers, Major
Swap Participants, and Futures Commission Merchants, 77 FR 20128
(Apr. 3, 2012).
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II. Final Rules and Rule Amendments

A. Recordkeeping

1. Introduction
    The Commission is adopting a recordkeeping program for SBSDs and
MSBSPs under Sections 15F and 17(a) of the Exchange Act that is modeled
on the recordkeeping requirements for broker-dealers as set forth in
Rules 17a-3 and 17a-4. Under this recordkeeping program, broker-dealer
SBSDs and MSBSPs--as broker-dealers--will be subject to Rules 17a-3 and
17a-4.\19\ The Commission is adopting amendments to these rules to
implement the recordkeeping requirements mandated under the Dodd-Frank
Act with respect to broker-dealer SBSDs and MSBSPs and to account for
the security-based swap and swap activities of stand-alone broker-
dealers.
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    \19\ A commenter requested clarification as to whether an OTC
derivatives dealer dually registered as an SBSD or MSBSP would be
subject to Rules 17a-3 and 17a-4, as amended, or Rules 18a-5 and
18a-6. An OTC derivatives dealer dually registered as an SBSD or
MSBSP is subject to Rules 17a-3 and 17a-4 (rather than Rules 18a-5
and 18a-6). The undesignated introductory paragraphs to Rules 17a-3,
17a-4, 18a-5, and 18a-6 have been modified to clarify this
application of the rules. In addition, as explained further below,
an OTC derivatives dealer dually registered as an SBSD will be
subject to Rules 18a-1, 18a-4, 18a-7, 18a-8, and 17a-13 rather than
15c3-1, 15c3-3, 17a-5, 17a-11, and Rules 18a-9. As a result, the
Commission has made the following conforming modifications to Rules
17a-3, 17a-4, 18a-7, and 18a-8: (1) Where Rules 17a-3 and 17a-4
refer to Rules 17a-5 or 17a-12, the Commission has added references
to Rule 18a-7; (2) where Rules 17a-3 and 17a-4 refer to Rule 15c3-1,
the Commission has added references to Rule 18a-1, if appropriate;
and (3) where Rules 17a-3 and 17a-4 refer to Rule 15c3-3, the
Commission has added references to Rule 18a-4.
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    Stand-alone and bank SBSDs and MSBSPs will be subject to Rules 18a-
5 and 18a-6, which are modeled on Rules 17a-3 and 17a-4, respectively,
as amended. Rules 18a-5 and 18a-6 do not include a parallel requirement
for every requirement in Rules 17a-3 and 17a-4 because some of the
requirements in Rules 17a-3 and 17a-4 relate to activities that are
either not expected or not permitted to be conducted by stand-alone and
bank SBSDs and MSBSPs. Further, the recordkeeping requirements
applicable to bank SBSDs and MSBSPs are more limited in scope because:
(1) The Commission's authority under Section 15F(f)(1)(B)(i) of the
Exchange Act is tied to activities related to the conduct of the firm's
business as an SBSD or MSBSP; (2) bank SBSDs and MSBSPs are subject to
recordkeeping requirements applicable to banks with respect to their
banking activities; and (3) the prudential regulators--rather than the
Commission--are responsible for capital, margin, and other prudential
requirements applicable to bank SBSDs and MSBSPs. For these reasons,
the recordkeeping requirements for bank SBSDs and MSBSPs are tailored
more specifically to their security-based swap activities as an SBSD or
MSBSP.
2. Records To Be Made and Kept Current
    The Commission is adopting amendments to Rule 17a-3 to account for
the security-based swap and swap activities of broker-dealers,
including broker-dealer SBSDs and MSBSPs.\20\ The Commission is
adopting Rule 18a-5--which is modeled on Rule 17a-3, as amended--to
require stand-alone and bank SBSDs and MSBSPs to make and keep current
certain records.\21\ As stated above, Rule 18a-5 does not include a
parallel requirement for every requirement in Rule 17a-3.\22\ Paragraph
(a) of Rule 18a-5 contains one set of recordkeeping requirements
applicable to stand-alone SBSDs and MSBSPs, and paragraph (b) of Rule
18a-5 contains a separate set of recordkeeping requirements applicable
to bank SBSDs and MSBSPs that are more limited in scope.
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    \20\ Broker-dealer SBSDs and MSBSPs are required to make and
keep current all the records required to be made and kept current by
broker-dealers under Rule 17a-3, as amended, plus the additional
records required specifically of an SBSD or MSBSP.
    \21\ See Rule 18a-5, as adopted. Paragraphs (a) and (b) of Rule
18a-5 now read ``make and keep current'' instead of ``make and
keep'' as proposed, to clarify the implicit requirement that a
firm's records should be current. This language is consistent with
Rule 17a-3, as amended, on which Rule 18a-5 is modeled.
    \22\ The Commission did not propose to include in Rule 18a-5
requirements that would parallel those set forth in paragraphs
(a)(4), (13) through (16), (19), and (20) of Rule 17a-3. See
Recordkeeping and Reporting Proposing Release, 79 FR at 25200, n.
67.
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    A commenter urged the Commission to harmonize its recordkeeping
requirements for SBSDs and MSBSPs with the CFTC's final recordkeeping
requirements for swap dealers and major swap participants to the
maximum extent possible, with the goal of permitting firms to utilize a
single recordkeeping system for swap and security-based swap
transactions and positions.\23\ As discussed in more detail below in
section II.E.1. of this release, in response to the comment and to
promote harmonization with CFTC requirements, the Commission is
adopting a limited alternative compliance mechanism in Rules 17a-3 and
18a-5.\24\ In particular, an SBSD or MSBSP that also is registered with
the CFTC as a swap dealer or major swap participant may comply with the
recordkeeping requirements of the CEA and the rules thereunder in lieu
of the requirements (discussed below) to make and keep current trade
blotters, customer account ledgers, and stock records solely with
respect to information required to be included in those records
regarding security-based swap transactions and positions if the SBSD or
MSBSP meets certain conditions. The conditions include,

among other things, that the SBSD or MSBSP preserves all of the data
elements necessary to create a trade blotter, customer account ledger,
or stock record reflecting security-based swap and swap transactions
and positions and upon request promptly furnishes to representatives of
the Commission such a trade blotter, customer account ledger, or stock
record that includes security-based swap and swap transactions and
positions in the format required by Rule 17a-3 or 18a-5, as applicable.
This provision will permit an SBSD or MSBSP that also is registered
with the CFTC as a swap dealer or major swap participant to maintain a
single recordkeeping system for security-based swap and swap
transactions and positions in accordance with the CFTC's rules with
respect to these required records.
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    \23\ See Letter from Mary Kay Scucci, Managing Director,
Securities Industry and Financial Markets Association (Sept. 5,
2014) (``SIFMA 9/5/2014 Letter'').
    \24\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted. As discussed in more detail below in
section II.E.2. of this release, the Commission also is amending
Rule 18a-10. Rule 18a-10 establishes a full alternative compliance
mechanism that will permit certain stand-alone SBSDs that are
registered as swap dealers and that predominantly engage in a swaps
business to elect to comply with the capital, margin, and
segregation requirements of the CEA and the CFTC's rules in lieu of
complying with the capital, margin, and segregation requirements of
the Commission's rules. The Commission is amending Rule 18a-10 in
this document to permit firms that will operate under Rule 18a-10 to
elect to comply with the recordkeeping and reporting requirements of
the CEA and the CFTC's rules in lieu of complying with Rules 18a-5,
18a-6, 18a-7, 18a-8, and 18a-9. Consequently, a stand-alone SBSD
that qualifies to use the full alternative compliance mechanism of
Rule 18a-10 can comply with the recordkeeping requirements of the
CEA and the CFTC's rules in lieu of complying with the requirements
of Rule 18a-5.
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    Rules 17a-3 and 18a-5 require broker-dealers, SBSDs, and MSBSPs to
make and keep current daily trading records, ledger accounts, a
securities record, memoranda of brokerage orders, and/or memoranda of
proprietary trades that include certain data elements with respect to
security-based swap transactions.\25\ The data elements are: (1) The
type of security-based swap; (2) the reference security, index, or
obligor; (3) the date and time of execution; (4) the effective date;
(5) the scheduled termination date; (6) the notional amount(s) and the
currenc(ies) in which the notional amount(s) is expressed; (7) the
unique transaction identifier; and (8) the counterparty's unique
identification code (collectively, the ``transaction data
elements'').\26\
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    \25\ See paragraphs (a)(1) and (3), (a)(5)(ii), (a)(6)(ii), and
(a)(7)(ii) of Rule 17a-3, as amended; paragraphs (a)(1) and (3),
(a)(4)(ii), (a)(5), (b)(1) and (2), (b)(3)(ii), and (b)(4) and (5)
of Rule 18a-5, as adopted.
    \26\ See paragraphs (a)(1) and (3), (a)(5)(ii), and (a)(6) of
Rule 17a-3, as amended; paragraphs (a)(1) and (3) through (5) and
(b)(1) through (5) of Rule 18a-5, as adopted.
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    As proposed, the counterparty's unique identification code data
element was the unique counterparty identifier.\27\ Commenters
suggested that the Commission replace the requirement to record the
unique counterparty identifier with a requirement to record the
counterparty's legal entity identifier (``LEI'').\28\ One commenter
further stated that the Commission should allow firms to use different
counterparty identifiers for internal purposes provided that they are
able to translate their internal counterparty identifiers into the
standard LEI convention.\29\
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    \27\ See, e.g., Recordkeeping and Reporting Proposing Release,
79 FR at 25201.
    \28\ See SIFMA 9/5/2014 Letter; Letter from Senator Carl Levin,
Chairman of Permanent Subcommittee on Investigations, U.S. Senate
(July 3, 2014) (``Levin Letter'').
    \29\ See SIFMA 9/5/2014 Letter.
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    For the sake of consistency with previously adopted Commission
rules, the Commission is replacing the requirement to record the unique
counterparty identifier throughout Rule 17a-3, as amended, and Rule
18a-5, as adopted, with a requirement to use the counterparty's unique
identification code (``UIC''), as defined in Regulation SBSR.\30\ In
particular, Regulation SBSR requires market participants--including
broker-dealers, SBSDs, and MSBSPs--to report certain data elements to
security-based swap data repositories (``SDRs''). One of the required
data elements is a UIC, which Rule 900 of Regulation SBSR defines as
``a unique identification code assigned to a person, unit of a person,
product, or transaction.'' \31\ SDRs must use UICs assigned by an
internationally recognized standards-setting system (``IRSS'') if an
IRSS has been recognized by the Commission and issues that type of
UIC.\32\ In the release adopting Regulation SBSR, the Commission
recognized the Global Legal Entity Identifier System (``GLEIS'')--which
is responsible for issuing LEIs--as an IRSS that satisfies the
requirements of Rule 903 of Regulation SBSR.\33\ Under Rule 903, if an
IRSS recognized by the Commission has assigned a UIC to a person, unit
of a person, or product, each SDR must employ that UIC for reporting
purposes under Regulation SBSR, and SDR participants must obtain such
UICs for use under Regulation SBSR. Although a firm may use different
counterparty identifiers for internal purposes, the firm's records
compiled pursuant to the recordkeeping rules being adopted in this
document must record the counterparty's UIC. To date, LEIs are the only
specific type of UIC that must be used under Regulation SBSR.\34\
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    \30\ 17 CFR 242.900-242.909. See Regulation SBSR--Reporting and
Dissemination of Security-Based Swap Information, Exchange Act
Release No. 74244 (Feb. 11, 2015), 80 FR 14563 at 14631-14632 (Mar.
19, 2015).
    \31\ See 17 CFR 242.900(qq).
    \32\ See 17 CFR 242.903 (``Rule 903'').
    \33\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, 80 FR at 14631-32.
    \34\ While the Commission to date has only recognized the GLEIS
as an IRSS, the rules being adopted in this document do not preclude
the use of UICs issued by any other organization that is recognized
as an IRSS in the future.
---------------------------------------------------------------------------

    In addition to that modification, the final requirements modify the
transaction data elements by replacing the data elements ``the
termination or maturity date'' and ``the notional amount'' with the
data elements ``the scheduled termination date'' and ``the notional
amount(s) and the currenc(ies) in which the notional amount(s) is
expressed'', respectively. This aligns the terminology identifying the
data elements with the terminology used in Regulation SBSR.\35\
---------------------------------------------------------------------------

    \35\ See 17 CFR 242.901 (``Rule 901''); Regulation SBSR--
Reporting and Dissemination of Security-Based Swap Information,
Exchange Act Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug.
12, 2016).
---------------------------------------------------------------------------

    The Commission stated when proposing the recordkeeping requirements
that ``[w]here a data element that would need to be documented in the
daily trading records of security-based swap transactions under the
proposed amendments to Rule 17a-3 or proposed Rule 18a-5 is
substantively the same as a data element that would need to be reported
under proposed Rule 901, the Commission preliminarily believes that the
type of information that would need to be documented in the daily
trading records could be the same data element reported under proposed
Rule 901.'' \36\ The following data element requirements being adopted
in this document use the same terminology as Rule 901 of Regulation
SBSR: (1) The date and time of execution; (2) the effective date; (3)
the scheduled termination date; and (4) the notional amount(s) and the
currenc(ies) in which the notional amount(s) is expressed. The
Commission clarifies that for these data elements registrants may
record the same information provided pursuant to the requirements of
Rule 901 to satisfy the related requirements of Rules 17a-3, as
amended, and 18a-5, as adopted.
---------------------------------------------------------------------------

    \36\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25201.
---------------------------------------------------------------------------

    Finally, a commenter urged the Commission to provide firms with the
flexibility to keep the proposed required trade blotters, general
ledgers, ledgers for customer accounts, and stock record (discussed
below) in various formats without mandating a particular format as long
as all required information is kept and accessible to the
Commission.\37\ For example, with respect to the stock record, the
commenter urged the Commission to provide SBSDs and MSBSPs flexibility
in the manner in which they create records for security-based swap
transactions and not mandate a detailed specified format (particularly
with respect to tracking collateral received and pledged), provided
that all required information is recorded and retained and can be
pulled together upon request to create something that recognizably

would be a record of the firm's security-based swap transactions.
---------------------------------------------------------------------------

    \37\ See SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------

    These types of records are fundamental business records that a
prudent company should make and retain in the ordinary course to
document and track, among other things, its operations, financial
account balances and transactions, asset and liability accounts, and
custodial positions. The daily creation of these records builds an
historical audit trail that can be used to reconstruct the sequence of
transactions and changes in balances and positions, and to reconcile
with third-party accounts. Having the records in place also can assist
a firm account for transactions, balances, and positions if data feeds
or other information systems that feed into the records are disrupted.
Moreover, broker-dealers have been required to make and retain these
types of records for their securities business and transactions for
many years, and the Commission does not believe that doing so imposes a
great burden. Further, based on staff experience, the Commission
believes that creating a daily record of this information will
facilitate the prompt production of the materials necessary for
examinations and the oversight of broker-dealers, SBSDs, and MSBSPs.
For these reasons, as discussed below, the Commission is adopting the
requirements substantially as proposed. However, except for the general
ledger, the firm can utilize the limited alternative compliance
mechanism with respect to these records as they pertain to security-
based swap and swap transactions and positions if the conditions of the
limited alternative compliance mechanism are met.\38\
---------------------------------------------------------------------------

    \38\ Certain stand-alone SBSDs may qualify to use the full
alternative compliance mechanism of Rule 18a-10, in which case they
may comply with the recordkeeping requirements of the CEA and the
CFTC's rules in lieu of complying with the requirements of Rule 18a-
5.
---------------------------------------------------------------------------

a. Amendments to Rule 17a-3 and New Rule 18a-5
Undesignated Introductory Paragraph
    The Commission proposed adding an undesignated introductory
paragraph to Rule 17a-3 explaining that the rule applies to a broker-
dealer, including a broker-dealer dually registered with the Commission
as an SBSD or MSBSP.\39\ The paragraph further explained that an SBSD
or MSBSP that is not dually registered as a broker-dealer (i.e., a
stand-alone SBSD or MSBSP, or bank SBSD or MSBSP) is subject to the
books and records requirements in proposed Rule 18a-5. Similarly,
proposed Rule 18a-5 included an undesignated introductory paragraph
explaining that the rule applies to an SBSD or MSBSP that is not dually
registered as a broker-dealer and that a broker-dealer that is dually
registered as an SBSD or MSBSP is subject to the books and records
requirements in Rule 17a-3. The Commission received no comments on the
proposed undesignated introductory paragraphs and is adopting them with
non-substantive modifications to clarify which rule (17a-3 or 18a-5)
applies to a given type of entity.\40\
---------------------------------------------------------------------------

    \39\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25201.
    \40\ See undesignated introductory paragraph of Rule 17a-3, as
amended; undesignated introductory paragraph of Rule 18a-5, as
adopted.
---------------------------------------------------------------------------

Trade Blotters
    Paragraph (a)(1) of Rule 17a-3 requires broker-dealers to make and
keep current trade blotters (or other records of original entry)
containing an itemized daily record of all transactions in securities,
all receipts and deliveries of securities, all receipts and
disbursements of cash, and all other debits and credits. The Commission
proposed to amend this paragraph to require that the trade blotters of
broker-dealers, including broker-dealer SBSDs and MSBSPs, contain
specific information about security-based swaps, including by recording
specific transaction data elements.\41\ The Commission proposed to
include parallel trade blotter requirements in Rule 18a-5 to apply to
stand-alone and bank SBSDs and MSBSPs.
---------------------------------------------------------------------------

    \41\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25201.
---------------------------------------------------------------------------

    As discussed above, a commenter urged the Commission to provide
firms with the flexibility to keep the proposed trade blotters in
various formats without mandating a particular format as long as all
required information is kept and accessible to the Commission.\42\ For
the reasons discussed above, the Commission does not believe this would
be appropriate. However, the Commission clarifies that a firm can
create two separate trade blotters (one for security-based swaps and
one for other types of positions). Moreover, as discussed in more
detail below in section II.E.1. of this release, to promote
harmonization with CFTC requirements and increase flexibility, an SBSD
or MSBSP that is also registered as a swap dealer or major swap
participant may opt to use the limited alternative compliance mechanism
with respect to these records as they pertain to security-based swap
and swap transactions and positions.\43\ For these reasons, the
Commission is adopting the trade blotter requirements substantially as
proposed.\44\
---------------------------------------------------------------------------

    \42\ See SIFMA 9/5/2014 Letter.
    \43\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted.
    \44\ See paragraph (a)(1) of Rule 17a-3, as amended; paragraphs
(a)(1) and (b)(1) of Rule 18a-5, as adopted. These paragraphs
require that the trade blotters (or other records of original entry)
include the following transaction data elements: (1) The type of
security-based swap; (2) the reference security, index, or obligor;
(3) the date and time of execution; (4) the effective date; (5) the
scheduled termination date; (6) the notional amount(s) and the
currenc(ies) in which the notional amount(s) is expressed; (7) the
unique transaction identifier; and (8) the counterparty's UIC. As
discussed above, these data elements were modified from the proposal
to require the counterparty's UIC and to conform to Rule 901.
---------------------------------------------------------------------------

General Ledger
    Paragraph (a)(2) of Rule 17a-3 requires broker-dealers, including
broker-dealer SBSDs and MSBSPs, to make and keep current ledgers (or
other records) reflecting all assets and liabilities, income and
expense and capital accounts. These records reflect the overall
financial condition of the broker-dealer and in the Commission's view
can incorporate security-based swap activities without the need for a
clarifying amendment. The Commission proposed a parallel provision in
Rule 18a-5 requiring stand-alone SBSDs and MSBSPs to make and keep
current the same types of general ledgers.\45\
---------------------------------------------------------------------------

    \45\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25201-02.
---------------------------------------------------------------------------

    As discussed above, a commenter urged the Commission to provide
firms with the flexibility to keep the proposed general ledger in
various formats as long as all required information is kept and
accessible to the Commission.\46\ For the reasons discussed above, the
Commission does not believe this would be appropriate. Moreover, as
discussed above, the Commission does not believe it would be
appropriate to apply the limited alternative compliance mechanism for
this record because the information that must be recorded in a general
ledger is broader than security-based swap information.\47\ For this
reason, the Commission is adopting the general ledger requirement as
proposed.\48\
---------------------------------------------------------------------------

    \46\ See SIFMA 9/5/2014 Letter.
    \47\ However, a stand-alone SBSD that qualifies to use the full
alternative compliance mechanism of Rule 18a-10 may comply with the
recordkeeping requirements of the CEA and the CFTC's rules in lieu
of complying with the requirements of Rule 18a-5.
    \48\ See paragraph (a)(2) of Rule 18a-5, as adopted.
---------------------------------------------------------------------------

Ledgers for Customer and Non-Customer Accounts
    Paragraph (a)(3) of Rule 17a-3 requires broker-dealers to make and
keep current certain ledger accounts (or other records) relating to
securities and

commodities transactions in customer and non-customer cash and margin
accounts. The Commission proposed to amend this paragraph to require
that broker-dealers, including broker-dealer SBSDs and MSBSPs, make and
keep current ledger accounts (or other records) that record specific
security-based swap transaction data elements.\49\ The Commission
proposed in Rule 18a-5 that stand-alone SBSDs and MSBSPs be required to
make and keep current the same types of ledgers (or other records).
However, the proposed rule text did not refer to ``cash and margin
accounts'' because these types of accounts involve activities that may
not be undertaken by stand-alone SBSDs and MSBSPs because they are not
registered as broker-dealers. The Commission proposed in Rule 18a-5
that bank SBSDs and MSBSPs make and keep current ledger accounts (or
other records) relating to securities and commodity transactions, but
only with respect to their security-based swap customers and non-
customers.
---------------------------------------------------------------------------

    \49\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25202.
---------------------------------------------------------------------------

    As discussed above, a commenter urged the Commission to provide
firms with the flexibility to keep the proposed ledgers for customer
accounts in various formats as long as all required information is kept
and accessible to the Commission.\50\ For the reasons discussed above,
the Commission does not believe this would be appropriate. However, as
discussed in more detail below in section II.E.1. of this release, to
promote harmonization with CFTC requirements and provide additional
flexibility, an SBSD or MSBSP that is also registered as a swap dealer
or major swap participant may opt to use the limited alternative
compliance mechanism with respect to these ledgers as they pertain to
security-based swap and swap transactions and positions.\51\ For these
reasons, the Commission is adopting the ledger account requirements
substantially as proposed.\52\
---------------------------------------------------------------------------

    \50\ See SIFMA 9/5/2014 Letter.
    \51\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted. Moreover, a stand-alone SBSD that
qualifies to use the full alternative compliance mechanism of Rule
18a-10 may comply with the recordkeeping requirements of the CEA and
the CFTC's rules in lieu of complying with the requirements of Rule
18a-5.
    \52\ See paragraph (a)(3) of Rule 17a-3, as amended; paragraphs
(a)(3) and (b)(2) of Rule 18a-5, as adopted. These paragraphs
require that the ledgers include the following transaction data
elements: (1) The type of security-based swap; (2) the reference
security, index, or obligor; (3) the date and time of execution; (4)
the effective date; (5) the scheduled termination date; (6) the
notional amount(s) and the currenc(ies) in which the notional
amount(s) is expressed; (7) the unique transaction identifier; and
(8) the counterparty's UIC. As discussed above, these data elements
were modified from the proposal to require the counterparty's UIC
and to conform to Rule 901.
---------------------------------------------------------------------------

Stock Record
    Paragraph (a)(5) of Rule 17a-3 requires broker-dealers to make and
keep current a securities record (also referred to as a ``stock
record''). This is a record of the broker-dealer's custody and movement
of securities. The ``long'' side of the record accounts for the broker-
dealer's responsibility as a custodian of securities and shows, for
example, the securities the firm has received from customers and
securities owned by the broker-dealer. The ``short'' side of the record
shows where the securities are located, such as at a securities
depository. The Commission proposed to amend this paragraph to require
that the securities record of broker-dealers, including broker-dealer
SBSDs and MSBSPs, specifically account for security-based swap activity
by reflecting separately for each security-based swap certain of the
transaction data elements and other information.\53\ In addition, the
Commission proposed parallel securities record requirements in Rule
18a-5 for stand-alone and bank SBSDs and MSBSPs. However, the
requirements for bank SBSDs and MSBSPs were limited to positions
related to their business as an SBSD or MSBSP.
---------------------------------------------------------------------------

    \53\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25202.
---------------------------------------------------------------------------

    As discussed above, a commenter urged the Commission to provide
firms with the flexibility to keep the proposed stock record in various
formats as long as all required information is kept and accessible to
the Commission.\54\ For the reasons discussed above, the Commission
does not believe this would be appropriate. However, as discussed in
more detail below in section II.E.1. of this release, to promote
harmonization with CFTC requirements and increase flexibility, an SBSD
or MSBSP that is also registered as a swap dealer or major swap
participant may opt to use the limited alternative compliance mechanism
with respect to the stock record as it pertains to security-based swap
and swap transactions and positions.\55\ The Commission also clarifies
that the requirement as adopted does not necessarily require the use of
two separate stock records (i.e., one for securities and one for
security-based swaps); instead, a broker-dealer SBSD may elect to use a
single stock record that incorporates all of its securities customers,
including security-based swap customers.
---------------------------------------------------------------------------

    \54\ See SIFMA 9/5/2014 Letter.
    \55\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted. Moreover, a stand-alone SBSD that
qualifies to use the full alternative compliance mechanism of Rule
18a-10 may comply with the recordkeeping requirements of the CEA and
the CFTC's rules in lieu of complying with the requirements of Rule
18a-5.
---------------------------------------------------------------------------

    A commenter stated that the Commission should replace the terms
``long'' and ``short'' in the proposed requirements with ``bought'' and
``sold,'' respectively.\56\ The commenter explained that the former two
terms were ``not really applicable'' to security-based swaps. The
Commission agrees and the final amendment and rule use the terms
``bought'' and ``sold.'' For the reasons discussed above, the
Commission is adopting the stock record requirements with this
modification but otherwise substantially as proposed.\57\
---------------------------------------------------------------------------

    \56\ See SIFMA 9/5/2014 Letter.
    \57\ See paragraph (a)(5)(ii) of Rule 17a-3, as amended;
paragraphs (a)(4) and (b)(3) of Rule 18a-5, as adopted. These
paragraphs require a securities record or ledger reflecting
separately for each security-based swap the following transaction
data elements: (1) The reference security, index, or obligor; (2)
the unique transaction identifier; and (3) the counterparty's UIC.
As discussed above, these data elements were modified from the
proposal to require the counterparty's UIC and to conform to Rule
901. The broker-dealer stock record requirement for securities other
than security-based swaps that pre-existed these amendments is being
preserved in paragraph (a)(5)(i) of Rule 17a-3, as amended.
---------------------------------------------------------------------------

Memoranda of Brokerage Orders
    Paragraph (a)(6) of Rule 17a-3 requires broker-dealers to make and
keep current a memorandum of each brokerage order, and of any other
instruction, given or received for the purchase or sale of a security.
The memorandum must show the terms and conditions of each brokerage
order. The Commission proposed to amend this paragraph to require
broker-dealers, including broker-dealer SBSDs and MSBSPs, to make and
keep current a memorandum of each brokerage order given or received for
the purchase or sale of a security-based swap.\58\ Further, the rule
required that certain of the security-based swap transaction data
elements be documented in the memorandum. The Commission proposed a
parallel provision in Rule 18a-5 for bank SBSDs and MSBSPs. The
Commission did not propose a parallel provision for stand-alone SBSDs
and MSBSPs because these registrants are not permitted to engage in the
business of effecting brokerage orders in security-based swaps without
registering as a broker-dealer or a bank.\59\
---------------------------------------------------------------------------

    \58\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25202-03.
    \59\ Generally, persons engaged in brokerage activities are
required to register as brokers under Section 15 of the Exchange
Act. However, Section 3(a)(4) of the Exchange Act permits banks to
engage in certain limited securities brokerage activities. See also
17 CFR 247.100-781 (joint Commission and the Federal Reserve rules
establishing further exemptions permitting banks to engage in
certain securities brokerage activities without registering as a
broker-dealer). Consequently, a bank SBSD or MSBSP may act as a
broker or agent in a security-based swap transaction. In such
instances, the brokerage order record requirements of paragraph
(b)(4) of Rule 18a-5 would apply.

---------------------------------------------------------------------------

    A commenter expressed general support for the proposed requirements
but asked the Commission to confirm that the order ticket requirement
only applies when there are in fact orders received for execution
(i.e., where the orders are potentially executed on a security-based
swap execution facility), and not where there is a negotiation that
results in a transaction without any executable order or other
instruction given.\60\ Furthermore, the commenter also asked the
Commission to confirm that no order ticket needs to be created by the
broker-dealer or its affiliated SBSD when a registered broker-dealer
acts as an agent in connection with negotiated transactions between an
affiliated SBSD and its customers without any executable order being
received. In response, the Commission clarifies that the firm must
receive an executable order or other instruction to trigger the
memorandum requirement (i.e., an order or instruction that the broker-
dealer, SBSD, or MSBSP has agreed to execute on behalf of the
counterparty). Consequently, preliminary negotiations or responding to
questions about a potential transaction alone do not trigger the
recordkeeping requirement. For these reasons, the Commission is
adopting these requirements substantially as proposed.\61\
---------------------------------------------------------------------------

    \60\ See SIFMA 9/5/2014 Letter.
    \61\ See paragraph (a)(6)(ii) of Rule 17a-3, as amended;
paragraph (b)(4) of Rule 18a-5, as adopted. These paragraphs require
that the memorandum include the following security-based swap
transaction data elements: (1) The type of security-based swap; (2)
the reference security, index, or obligor; (3) the date and time of
execution; (4) the effective date; (5) the scheduled termination
date; (6) the notional amount(s) and the currenc(ies) in which the
notional amount(s) is expressed; (7) the unique transaction
identifier; and (8) the counterparty's UIC. As discussed above,
these data elements were modified from the proposals to require the
counterparty's UIC and to conform to Rule 901. The broker-dealer
memorandum requirement for securities other than security-based
swaps that pre-existed these amendments is being preserved in
paragraph (a)(6)(i) of Rule 17a-3, as amended.
---------------------------------------------------------------------------

Memoranda of Proprietary Orders
    Paragraph (a)(7) of Rule 17a-3 requires broker-dealers to make and
keep current a memorandum of each purchase and sale for the account of
the broker-dealer. Generally, this paragraph requires broker-dealers to
document the terms of securities transactions where they are acting as
a dealer or otherwise trading for their own account. The Commission
proposed to amend this paragraph to require the terms of security-based
swap transactions to be documented as well.\62\ In addition, the
Commission proposed parallel memorandum requirements in Rule 18a-5 for
stand-alone and bank SBSDs and MSBSPs, but only with respect to
security-based swap transactions. The Commission received no comment
that specifically addressed these proposed requirements and is adopting
them substantially as proposed.\63\
---------------------------------------------------------------------------

    \62\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25203-04.
    \63\ See paragraph (a)(7)(ii) of Rule 17a-3, as amended;
paragraphs (a)(5) and (b)(4) of Rule 18a-5, as adopted. These
paragraphs require that the memorandum include the following
security-based swap transaction data elements: (1) The type of
security-based swap; (2) the reference security, index, or obligor;
(3) the date and time of execution; (4) the effective date; (5) the
scheduled termination date; (6) the notional amount(s) and the
currenc(ies) in which the notional amount(s) is expressed; (7) the
unique transaction identifier; and (8) the counterparty's UIC. As
discussed above, these data elements were modified from the
proposals to require the counterparty's UIC and to conform to Rule
901. The broker-dealer memorandum requirement for securities (other
than security-based swaps) that pre-existed these amendments is
being preserved in paragraph (a)(7)(i) of Rule 17a-3, as amended.
---------------------------------------------------------------------------

Confirmations
    Paragraph (a)(8) of Rule 17a-3 requires broker-dealers to keep
copies of all trade confirmations. In addition, the Commission has
adopted rules that require SBSDs and MSBSPs to provide trade
acknowledgments containing the details of a security-based swap
transaction within prescribed timeframes and to establish, maintain,
and enforce written policies and procedures that are reasonably
designed to obtain prompt verification of the terms of the trade
acknowledgments.\64\ In particular, Rule 15Fi-2 requires SBSDs and
MSBSPs to promptly verify the accuracy of, or otherwise dispute with
their counterparties, the terms of trade acknowledgments they receive.
---------------------------------------------------------------------------

    \64\ See 17 CFR 240.15Fi-2 (``Rule 15Fi-2''); see also Trade
Acknowledgment and Verification of Security-Based Swap Transactions,
Exchange Act Release No. 78011 (June 8, 2016), 81 FR 39807 (June 17,
2016).
---------------------------------------------------------------------------

    The Commission proposed to amend paragraph (a)(8) of Rule 17a-3 to
require that broker-dealers, including broker-dealer SBSDs and MSBSPs,
make and keep current copies of the security-based swap trade
acknowledgments and verifications made pursuant to Rule 15Fi-2.\65\ The
Commission also proposed in Rule 18a-5 that stand-alone SBSDs and
MSBSPs make and keep current copies of: (1) Confirmations of all
purchases or sales of securities that are not security-based swaps; and
(2) security-based swap trade acknowledgments and verifications made
pursuant to Rule 15Fi-2. The Commission further proposed parallel
confirmation requirements in Rule 18a-5 for bank SBSDs and MSBSPs.
However, the requirement to make and keep current copies of
confirmations of all purchases and sales of securities that are not
security-based swaps would be limited to transactions that related to
their business as an SBSD or MSBSP.
---------------------------------------------------------------------------

    \65\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25204.
---------------------------------------------------------------------------

    A commenter stated that the Commission should not require a bank
SBSD or MSBSP to make and keep current copies of all confirmations of
all purchases and sales of securities (other than security-based swaps)
or, in the alternative, the Commission should narrowly interpret when
securities transactions are ``related to the business'' of a bank as an
SBSD or MSBSP.\66\ The Commission disagrees that confirmations should
not be made for transactions when the security is not a security-based
swap. A confirmation of any securities transaction that occurs within a
security-based swap account will assist examiners in reviewing all the
activities in the account and whether the firm is acting in accordance
with applicable securities laws. The Commission notes, however, that a
bank SBSD or MSBSP must make and keep current copies of confirmations
relating to transactions in securities, other than security-based
swaps, only if the transaction relates to its business as an SBSD or
MSBSP. Consequently, the final requirements do not apply to a security
transaction that relates solely to the bank acting as a bank and not as
an SBSD or MSBSP. For these reasons, the Commission is adopting the
requirements as proposed.\67\
---------------------------------------------------------------------------

    \66\ See SIFMA 9/5/2014 Letter.
    \67\ See paragraph (a)(8)(ii) of Rule 17a-3, as amended;
paragraphs (a)(6) and (b)(6) of Rule 18a-5, as adopted. The broker-
dealer confirmation requirement for securities other than security-
based swaps that pre-existed these amendments is being preserved in
paragraph (a)(8)(i) of Rule 17a-3, as amended.
---------------------------------------------------------------------------

Accountholder Information
    Paragraph (a)(9) of Rule 17a-3 requires broker-dealers to make a
record for each securities accountholder that contains certain
information about the person. The Commission proposed to amend this
paragraph to require broker-dealers, including broker-dealer SBSDs and
MSBSPs, to record certain information with respect to security-

based swap accountholders.\68\ The Commission proposed parallel
requirements in Rule 18a-5 for stand-alone and bank SBSDs and MSBSPs
with respect to recording the information about security-based swap
accountholders.
---------------------------------------------------------------------------

    \68\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25204.
---------------------------------------------------------------------------

    A commenter stated that it is not common practice in the swaps
market to obtain signatures of persons authorized to transact business
on behalf of a counterparty in a swap account and recommended instead
that broker-dealers, SBSDs, and MSBSPs be permitted to satisfy this
requirement by establishing policies and procedures relating to
counterparty trade authorization.\69\ It is a prudent business practice
for financial institutions to formalize relationships with their
counterparties and to take orders from individuals only if they are
authorized to enter into transactions on behalf of the counterparty.
This provides greater legal certainty in terms of enforcing the rights
of the financial institution and its counterparty. Obtaining the
signatures of persons authorized to transact on behalf of the
counterparty is one way to promote these objectives, but the Commission
agrees with the commenter that it is not the only way. Maintaining a
record of persons authorized to transact on behalf of the counterparty
such as a copy of a corporate resolution granting the person such
authority is another way. Consequently, the Commission is modifying the
text of the final rules so that the means of establishing a record of
the authorization of each person to whom the counterparty has granted
authority to transact business in the security-based swap account are
not limited to obtaining signatures of such persons. In particular, the
final rules provide that, for each security-based swap account, the
broker-dealer, SBSD, or MSBSP must make and retain a record of the
authorization of each person the counterparty has granted authority to
transact business in the security-based swap account. This record could
be, for example, a signature of the person, a copy of the corporate
resolution of the counterparty granting the person authority to trade
on its behalf, or a communication from the counterparty identifying the
person as having been granted authority to act on its behalf. In
addition to promoting the objectives described above, this record will
assist Commission staff in examining whether a given transaction has
been appropriately authorized.
---------------------------------------------------------------------------

    \69\ See SIFMA 9/5/2014 Letter.
---------------------------------------------------------------------------

    Another commenter raised concerns about disclosures to the
Commission regarding clients, associated persons, or other such persons
arising from confidentiality requirements under the local laws of
certain non-U.S. jurisdictions.\70\ The Commission understands that
some foreign laws and regulations may limit or prevent disclosure of
customer information to the Commission. These types of restrictions may
include privacy laws, which generally restrict disclosure of certain
identifying information about a natural person or entity, and so-called
``blocking statutes'' (including secrecy laws) that prevent the
disclosure of information relating to third parties and/or foreign
governments. In response, the Commission notes that it has proposed in
a separate release additional provisions that are designed to address
concerns about the cross-border application of certain requirements
that will be or have been proposed to be applicable to SBSDs and
MSBSPs.\71\ For the foregoing reasons, the Commission is adopting the
accountholder requirements with the modifications discussed above.\72\
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    \70\ See SIFMA 9/5/2014 Letter; Letter from Institute of
International Bankers and Securities Industry and Financial Markets
Association (June 21, 2018) (``IIB/SIFMA 6/21/2018 Letter'').
    \71\ See Proposed Rule Amendments and Guidance Addressing Cross-
Border Application of Certain Security-Based Swap Requirements,
Exchange Act Release No. 85823 (May 10, 2019), 84 FR 24206 (May 14,
2019) (``Cross-Border Application Proposing Release'').
    \72\ See paragraph (a)(8)(iv) of Rule 17a-3, as amended;
paragraphs (a)(7) and (b)(7) of Rule 18a-5, as adopted. These
paragraphs require that SBSDs and MSBSPs record for each security-
based swap account the counterparty's UIC, along with other
information. For the reasons discussed above, the ``unique
counterparty identifier'' transaction data element in the proposed
requirement was replaced with the counterparty's UIC. The broker-
dealer accountholder requirement for securities other than security-
based swaps that pre-existed these amendments is being preserved in
paragraphs (a)(1)(i) through (iii) of Rule 17a-3, as amended.
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Options Positions
    Paragraph (a)(10) of Rule 17a-3 requires broker-dealers to make and
keep current a record of all options positions. The Commission did not
propose to amend this paragraph to account for security-based swaps. In
addition, because the records required under this paragraph are not
specific to security-based swaps, the Commission did not propose to
include an analogous provision applicable to bank SBSDs and MSBSPs.
However, in order to facilitate the monitoring of the financial
condition of stand-alone SBSDs and MSBSPs, the Commission proposed a
parallel provision in Rule 18a-5 applicable to these entities.\73\ One
commenter expressed support for this proposed requirement.\74\ The
Commission is adopting the options position recordkeeping requirement
as proposed.\75\
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    \73\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25204-05.
    \74\ See SIFMA 9/5/2014 Letter.
    \75\ See paragraph (a)(8) of Rule 18a-5, as adopted.
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Trial Balances and Computation of Net Capital
    Paragraph (a)(11) of Rule 17a-3 requires broker-dealers, including
broker-dealer SBSDs and MSBSPs, to make and keep current a record of
the proof of money balances of all ledger accounts in the form of trial
balances and certain records relating to the computation of aggregate
indebtedness and net capital under the broker-dealer net capital
rule.\76\ The Commission did not propose that bank SBSDs and MSBSPs
make similar records as the prudential regulators administer the
capital requirements applicable to these entities.\77\ The Commission
did propose a parallel requirement in Rule 18a-5 for stand-alone SBSDs
and MSBSPs to facilitate the review and monitoring of their financial
condition and their compliance with the regulatory capital requirements
in proposed Rules 18a-1 and 18a-2, respectively.\78\ One commenter
noted the importance of including recordkeeping and reporting
requirements with respect to trial balances and the computation of net
capital.\79\ The Commission has adopted capital requirements for stand-
alone SBSDs and MSBSPs in Rules 18a-1 and 18a-2, respectively.\80\
Consequently, the Commission is adopting the trial balances and
computation of net capital recordkeeping requirement for stand-alone
SBSDs and MSBSPs as proposed.\81\
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    \76\ The broker-dealer net capital rule is codified at 17 CFR
240.15c3-1 (``Rule 15c3-1'').
    \77\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25205.
    \78\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital Requirements for Broker-Dealers, Exchange
Act Release No. 68071 (Oct. 18, 2012), 77 FR 70241, 70217-57 (Nov.
23, 2012) (``Capital, Margin, and Segregation Proposing Release'')
(proposing Rules 18a-1 and 18a-2).
    \79\ See SIFMA 9/5/2014 Letter. The commenter also made
substantive recommendations concerning the proposed net capital
requirements for SBSDs and MSBSPs that are beyond the scope of this
release.
    \80\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43879-908.
    \81\ See paragraph (a)(9) of Rule 18a-5, as adopted.

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Associated Persons
    Paragraph (a)(12) of Rule 17a-3 requires broker-dealers, including
broker-dealer SBSDs and MSBSPs, to make and keep current a
questionnaire or application for employment for each associated person
that contains information about the associated person (the
``questionnaire requirement'') as well other information about
associated persons. The Commission proposed parallel requirements in
Rule 18a-5 for stand-alone and bank SBSDs and MSBSPs.\82\ Further, the
Commission proposed to amend the definition of ``associated person'' in
Rule 17a-3 to include in the definition a person associated with an
SBSD or MSBSP as defined in Section 3(a)(70) of the Exchange Act. The
Commission proposed a parallel definition in Rule 18a-5. However, the
proposed Rule 18a-5 definition was more limited as applied to bank
SBSDs and MSBSPs in that it covered persons whose activities relate to
the conduct of the bank's business as an SBSD or MSBSP.
---------------------------------------------------------------------------

    \82\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25205.
---------------------------------------------------------------------------

    Commenters requested that the Commission limit the proposed
questionnaire requirement for stand-alone and bank SBSDs and MSBSPs to
associated persons who effect or are involved in effecting security-
based swaps on the firm's behalf.\83\ The Commission agrees with the
comments. The questionnaire requirement, as proposed, was designed to
provide a basis for assessing compliance with Section 15F(b)(6) of the
Exchange Act and a related rule thereunder.\84\ Both the statute and
the rule (Rule 15Fb6-2) apply to associated persons who effect or are
involved in effecting security-based swaps on behalf of the SBSD or
MSBSP.\85\ Accordingly, the Commission is narrowing the scope of the
questionnaire requirement in Rule 18a-5 for stand-alone and bank SBSDs
and MSBSPs so that it applies only with respect to associated persons
who effect or are involved in effecting security-based swaps on the
firm's behalf.\86\
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    \83\ See, e.g., SIFMA 9/5/2014 Letter; IIB/SIFMA 6/21/2018
Letter.
    \84\ See 17 CFR 15Fb6-2 (``Rule 15Fb6-2'').
    \85\ Section 15F(b)(6) of the Exchange Act provides that it
shall be unlawful for an SBSD or MSBSP to permit any associated
person of the SBSD or MSBSP who is subject to a statutory
disqualification to effect or be involved in effecting security-
based swaps on its behalf, if the SBSD or MSBSP knows, or in the
exercise of reasonable care should have known, of the statutory
disqualification, except to the extent otherwise provided by rule,
regulation, or order of the Commission. Rule 15Fb6-2: (1) Prohibits
an SBSD or MSBSP from acting as an SBSD or MSBSP unless it has
certified electronically that it neither knows, nor in the exercise
of reasonable care should have known, that any person associated
with the SBSD or MSBSP ``who effects or is involved in effecting
security-based swaps on behalf of the [SBSD] or [MSBSP] is subject
to a statutory disqualification''; and (2) requires the Chief
Compliance Officer (or his or her designee) of the SBSD or MSBSP to
review and sign the questionnaire or application for employment
executed by every associated person who is a natural person and who
effects or is involved in effecting security-based swaps on the
SBSD's or MSBSP's behalf, and that this questionnaire or application
shall serve as the basis for a background check of the associated
person to verify that the person is not subject to a statutory
disqualification.
    \86\ See paragraphs (a)(10)(i) and (b)(8)(i) of Rule 18a-5, as
adopted. The Commission is also modifying paragraph (b)(8)(i) of
Rule 18a-5 as proposed to eliminate the phrase ``whose activities
relate to the business of the security-based swap dealer or major
security-based swap participant.'' As discussed above, the
Commission proposed this limitation on the scope of the
questionnaire or application for employment to address bank SBSDs
and MSBSPs. This limitation is no longer necessary in light of the
final rule's limitation to an associated person ``who effects or is
involved in effecting security-based swaps on the security-based
swap dealer's or major security-based swap participant's behalf.''
---------------------------------------------------------------------------

    A commenter also requested that the Commission modify the proposal
for foreign SBSDs and MSBSPs so that the questionnaire requirement does
not apply to associated persons who effect or are involved in effecting
security-based swap transactions with non-U.S. persons or foreign
branches.\87\ As noted above, the questionnaire requirement is intended
to support the substantive prohibition in Section 15F(b)(6) of the
Exchange Act and the related certification and background check
requirements in Rule 15Fb6-2. The Commission recognizes, however, as
noted by the commenters, that there may be situations in which an SBSD
or MSBSP is prohibited by applicable non-U.S. law from receiving,
creating, or maintaining records with respect to certain of the
information that needs to be recorded pursuant to the questionnaire
requirement. Consequently, the Commission has proposed in a separate
release additional provisions in Rule 18a-5 that would address
situations where the law of a non-U.S. jurisdiction in which an
associated person is employed or located may prohibit a stand-alone or
bank SBSD or MSBSP from receiving, or creating or maintaining a record
of, any of the information mandated by the questionnaire
requirement.\88\
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    \87\ See SIFMA 9/5/2014 Letter.
    \88\ See Cross-Border Application Proposing Release, 84 FR at
24206.
---------------------------------------------------------------------------

    Finally, for the sake of clarity, the Commission emphasizes that
these associated person recordkeeping requirements apply to natural
persons and not to legal entities that may be associated persons. For
the reasons stated above, the Commission is adopting the associated
person recordkeeping requirements with the modifications discussed
above.\89\
---------------------------------------------------------------------------

    \89\ See paragraphs (a)(10) and (b)(8) of Rule 18a-5, as
adopted.
---------------------------------------------------------------------------

Liquidity Stress Test
    In 2012, the Commission proposed liquidity stress test requirements
for entities that are or would be authorized to use internal models to
compute net capital; namely, certain stand-alone broker-dealers (``ANC
broker-dealers'') as well as certain broker-dealer and stand-alone
SBSDs.\90\ Consequently, the Commission proposed that these entities be
required to make and keep current certain records relating to the
liquidity stress test requirements, if applicable.\91\ The Commission
has deferred consideration of the proposed liquidity stress test
requirements.\92\ Accordingly, the Commission is deferring
consideration of the related recordkeeping requirements.\93\
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    \90\ See Capital, Margin, and Segregation Proposing Release, 77
FR at 70252-54.
    \91\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25205-06.
    \92\ See Capital, Margin, and Segregation Adopting Release, 84
FR at 43874.
    \93\ Paragraph (a)(24) of Rule 17a-3, as proposed; paragraph
(a)(11) of Rule 18a-5, as proposed. The proposed recordkeeping
requirements would have been set forth in these paragraphs. Since
the publication of the recordkeeping and reporting proposing
release, a new paragraph (a)(24) has been adopted by the Commission.
See Form CRS Relationship Summary; Amendments to Form ADV, Exchange
Act Release No. 86032 (June 5, 2019), 84 FR 33492, (July 12, 2019);
17 CFR 240.17a-3(a)(24). Paragraph (a)(11) of Rule 18a-5 is being
designated as ``[Reserved].''
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Account Equity and Margin Calculations
    The Commission proposed to amend Rule 17a-3 to require broker-
dealer SBSDs and MSBSPs to make and keep current a record of the daily
calculations that would be required under the proposed margin rule for
non-cleared security-based swaps--Rule 18a-3.\94\ The Commission
proposed a parallel requirement in Rule 18a-5 for stand-alone SBSDs and
MSBSPs. A commenter expressed support for the proposal \95\ and the
Commission has adopted Rule 18a-3 requiring the daily calculations.\96\
For the reasons discussed in the proposing release, the

Commission is adopting daily calculation recordkeeping requirements
substantially as proposed.\97\
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    \94\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25206-07. See also Capital, Margin, and Segregation Proposing
Release, 77 FR at 70261-63 (proposing Rule 18a-3, requiring, among
other things, that nonbank SBSDs perform two daily calculations for
each security-based swap account (the equity in the account and a
margin amount) and nonbank MSBSPs to perform one daily calculation
(the equity in the account)).
    \95\ See SIFMA 9/5/2014 Letter.
    \96\ Capital, Margin, and Segregation Adopting Release, 84 FR at
43909-17.
    \97\ See paragraph (a)(25) of Rule 17a-3, as amended; paragraph
(a)(12) of Rule 18a-5, as adopted. As proposed, these paragraphs
referred to the ``amount of equity'' in the account and the ``margin
amount.'' Rule 18a-3, as adopted, refers instead to the ``current
exposure'' and ``initial margin amount.'' Consequently, the
paragraphs of the recordkeeping rules as adopted refer to the
``current exposure'' and ``initial margin amount.''
---------------------------------------------------------------------------

Possession or Control Requirements
    The Commission proposed to amend Rule 17a-3 to require broker-
dealer SBSDs to make and keep current a record of compliance with the
possession or control requirements in the proposed segregation rule for
SBSDs--Rule 18a-4.\98\ The Commission proposed a parallel requirement
in Rule 18a-5 for stand-alone SBSDs. A commenter supported the proposal
\99\ and the Commission has adopted Rule 18a-4 prescribing possession
or control requirements.\100\ For the reasons discussed in the
proposing release, the Commission is adopting the security-based swap
possession or control recordkeeping requirements substantially as
proposed.\101\
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    \98\ See Recordkeeping and Reporting Proposing Release, 79 FR at
25207. See also Capital, Margin, and Segregation Proposing Release,
77 FR at 70278-82 (proposing Rule 18a-4 requiring, among other
things, that SBSDs maintain possession or control over excess
securities collateral).
    \99\ See SIFMA 9/5/2014 Letter.
    \100\ Capital, Margin, and Segregation Adopting Release, 84 FR
at 43930-44.
    \101\ See paragraph (a)(26) of Rule 17a-3, as amended;
paragraphs (a)(13) and (b)(9) of Rule 18a-5, as adopted. The
Commission proposed that Rule 18a-4 apply to all SBSDs, but in
response to comment adopted security-based swap segregation
requirements for broker-dealers, including broker-dealer SBSDs, in
the broker-dealer segregation rule, which is codified at 17 CFR
240.15c3-3 (``Rule 15c3-3''). As a result, the Commission is
modifying the cross references in paragraph (a)(26) of Rule 17a-3 to
reflect the placement of the customer protection requirements for
broker-dealer SBSDs in paragraph (p) of Rule 15c3-3 rather than in
paragraph (b) of Rule 18a-4 as proposed. Paragraphs (a)(13) and
(b)(9) of Rule 18a-5, as adopted, which apply to stand-alone and
bank SBSDs, respectively, are not affected by this change.
---------------------------------------------------------------------------

Customer Reserve Account Requirements
    The Commission proposed to amend Rule 17a-3 to require broker-
dealer SBSDs to make and keep current a record of security-based swap
reserve account computations pursuant to proposed Rule 18a-4.\102\ The
Commission proposed a parallel requirement in Rule 18a-5 for stand-
alone SBSDs. A commenter expressed support for the proposal \103\ and
the Commission has amended Rule 15c3-3 and adopted Rule 18a-4 to
prescribe security-based swap reserve account requirements.\104\ For
the reasons discussed in the proposing release, the Commission is
adopting the security-based swap customer reserve account recordkeeping
requirements substantially as proposed.\105\
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    \102\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25207-08.
    \103\ See SIFMA 9/5/2014 Letter.
    \104\ Capital, Margin, and Segregation Adopting Release, 84 FR
at 43938-42.
    \105\ See paragraph (a)(27) of Rule 17a-3, as amended;
paragraphs (a)(14) and (b)(10) of Rule 18a-5, as adopted. Because
the segregation requirements were codified in Rules 15c3-3 and 18a-
4, the Commission is modifying the cross references in new paragraph
(a)(27) of Rule 17a-3 to new paragraph (p) of Rule 15c3-3 rather
than in paragraph (b) of new Rule 18a-4 as proposed. Paragraphs
(a)(14) and (b)(10) of Rule 18a-5 are not affected by this change.
---------------------------------------------------------------------------

Unverified Transactions
    It is prudent practice for counterparties to promptly confirm the
terms of executed OTC derivatives transactions.\106\ The Commission
adopted Rule 15Fi-2 to promote this practice. As discussed above, Rule
15Fi-2 requires, among other things, that SBSDs and MSBSPs provide
trade acknowledgments containing the details of security-based swap
transactions and promptly verify the accuracy of, or otherwise dispute
with their counterparties, the terms of trade acknowledgments they
receive. To promote compliance with then proposed Rule 15Fi-2 and the
risk management practices of SBSDs and MSBSPs, the Commission proposed
to amend Rule 17a-3 and include parallel provisions in Rule 18a-5 that
would require these entities to make and keep current a record of each
security-based swap trade acknowledgment that is not verified within
five business days of execution.\107\ While the Commission did not
prescribe a timeframe for security-based swap trade acknowledgments to
be verified, paragraph (e) of Rule 15Fi-2 requires procedures
reasonably designed to obtain ``prompt verification.''
---------------------------------------------------------------------------

    \106\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39807.
    \107\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25208.
---------------------------------------------------------------------------

    A commenter urged the Commission not to establish a rigid threshold
of five business days and suggested that the Commission ``enter into a
constructive dialogue with interested constituencies to establish best
practices for trade verification.''\108\ The requirement to make a
record of security-based swap trade acknowledgments not verified within
five business days is not intended to establish a maximum timeframe
within which verification should be obtained pursuant to Rule 15Fi-2.
Instead, it is designed to require SBSDs and MSBSPs to make a record of
the transactions that have gone unverified for a significant length of
time, as the delay in obtaining verification may indicate, for example,
the existence of a disagreement with the counterparty as to the terms
of the transaction. The Commission believes that five business days
represents an appropriate amount of time to wait before requiring a
record to be made. This timeframe is designed to strike an appropriate
balance in terms of a time period that is not too short and would
capture information that is not relevant to Rule15Fi-2 or that is too
long and would not promote compliance with Rule 15Fi-2. For these
reasons, the Commission is adopting the unverified transaction
recordkeeping requirements substantially as proposed.\109\
---------------------------------------------------------------------------

    \108\ See SIFMA 9/5/2014 Letter.
    \109\ See paragraph (a)(28) of Rule 17a-3, as amended;
paragraphs (a)(15) and (b)(11) of Rule 18a-5, as adopted. For the
reasons discussed above, the Commission modified the proposed rule
text in these paragraphs to replace the requirement to record the
``unique counterparty identifier'' with the counterparty's UIC. See
paragraph (a)(28) of Rule 17a-3, as proposed to be amended;
paragraphs (a)(15) and (b)(11) of Rule 18a-5, as proposed to be
adopted.
---------------------------------------------------------------------------

    Finally, the Commission has previously noted that in complying with
the trade acknowledgement and verification requirements, policies and
procedures reasonably designed to ensure prompt verification of a
transaction may include policies and procedures under which an SBSD or
MSBSP relies on its counterparty's negative affirmation to the terms of
a trade acknowledgment. The Commission has stated that those policies
and procedures generally should require the SBSD or MSBSP to document
its counterparty's agreement to rely on negative affirmation.\110\ As
such, transactions verified by negative affirmation do not need to be
recorded as unverified under Rules 17a-3 and 18a-5.
---------------------------------------------------------------------------

    \110\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, 81 FR at 39820.
---------------------------------------------------------------------------

Records Relating to Business Conduct Standards
    The Commission has adopted rules to establish business conduct and
chief compliance officer requirements for SBSDs and MSBSPs.\111\ The

requirements in these rules address (among other things):
---------------------------------------------------------------------------

    \111\ See 17 CFR 240.15Fh-1 (``Rule 15Fh-1''); 17 CFR 240.15Fh-2
(``Rule 15Fh-2''); 17 CFR 240.15Fh-3 (``Rule 15Fh-3''); 17 CFR
240.15Fh-4 (``Rule 15Fh-4''); 17 CFR 240.15Fh-5 (``Rule 15Fh-5'');
17 CFR 240.15Fh-6 (``Rule 15Fh-6''); 17 CFR 240.15Fk-1 (``Rule 15Fk-
1''). See also Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Exchange Act
Release No. 77617 (Apr. 14, 2016), 81 FR 29960 (May 13, 2016).
---------------------------------------------------------------------------

     Verification of the status of the counterparty;
     Certain disclosures related to the daily mark and its
calculation;
     Disclosures regarding material incentives, conflicts of
interest, material risks, and characteristics of the security-based
swap, and certain clearing rights;
     Certain ``know your counterparty'' and suitability
obligations for SBSDs;
     Supervisory requirements, including written policies and
procedures;
     Certain requirements regarding interactions with special
entities;
     Provisions intended to prevent SBSDs from engaging in
certain ``pay to play'' activities; and
     Certain minimum requirements relating to chief compliance
officers.
    To promote compliance with these then-proposed requirements, the
Commission proposed to amend Rule 17a-3 and include parallel provisions
in Rule 18a-5 that would require all SBSDs to make and keep current a
record that demonstrates their compliance with Rule 15Fh-6 (regarding
political contributions by certain SBSDs).\112\ In addition, the
Commission proposed to amend Rule 17a-3 and include parallel provisions
in Rule 18a-5 to require that all SBSDs and MSBSPs make and keep
current a record that demonstrates their compliance with Rules 15Fh-1
through 15Fh-5 and Rule 15Fk-1, as applicable.\113\ These recordkeeping
requirements would require covered firms to keep supporting documents
evidencing their compliance with the business conduct and chief
compliance officer requirements; a mere attestation of compliance would
not be sufficient. To the extent that the rules require providing or
receiving written disclosures or written representations, the SBSD or
MSBSP would be required to retain a copy of the disclosures or
representations.
---------------------------------------------------------------------------

    \112\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25208.
    \113\ Paragraph (b)(2) of Rule 15Fk-1 requires chief compliance
officers of SBSDs and MSBSPs to take reasonable steps to ensure that
the registrant establishes, maintains, and reviews written policies
and procedures reasonably designed to achieve compliance with the
Exchange Act and the rules and regulations thereunder relating to
its business as an SBSD or MSBSP.
---------------------------------------------------------------------------

    A commenter asked the Commission to confirm that the proposed
requirements would not create additional recordkeeping obligations with
respect to the business conduct standards,\114\ particularly with
respect to the requirements relating to compliance with such
requirements.\115\ The commenter also generally stated that the
Commission should not adopt additional recordkeeping rules relating to
the pay-to-play provisions set forth in the Commission's business
conduct release.\116\
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    \114\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, 76 FR 42396.
    \115\ See SIFMA 9/5/2014 Letter.
    \116\ See id. See also Business Conduct Standards for Security-
Based Swap Dealers and Major Security-Based Swap Participants, 81 FR
29960.
---------------------------------------------------------------------------

    In response to the commenter's concern, the Commission notes that
the proposed recordkeeping requirements were not intended to add
additional substantive business conduct or pay-to-play requirements.
The relevant substantive requirements are prescribed in the business
conduct and pay-to-play rules; the recordkeeping requirements are
designed to require records of compliance with those already existing
substantive requirements. The Commission acknowledges, however, that
they would impose new requirements to document a registrant's
compliance with several of the substantive business conduct and pay-to-
play requirements as well as new requirements to provide written
documentation where the business conduct and pay-to-play rules allowed
for oral disclosure. These proposed documentation requirements were
designed to assist Commission examiners in reviewing compliance with
the business conduct and pay-to-play requirements, and the anticipated
additional burdens they will impose on registrants are discussed below
in Sections IV and V. For these reasons, the Commission is adopting the
business conduct standards recordkeeping requirements substantially as
proposed.\117\
---------------------------------------------------------------------------

    \117\ See paragraph (a)(30) of Rule 17a-3, as amended;
paragraphs (a)(17) and (b)(13) of Rule 18a-5, as adopted. For the
sake of clarity, the rules as adopted require ``[a] record
documenting'' compliance with the business conduct standards, as
opposed to ``[a] record that demonstrates'' such compliance as
proposed. In addition, because Rule 15Fh-6 applies only to SBSDs,
and not to MSBSPs, the Commission is removing the proposed reference
to MSBSPs in paragraphs (a)(16) and (b)(12) of Rule 18a-5. On
October 31, 2018, it issued a statement setting forth the
Commission's position that, for a period of five years from the
Registration Compliance Date for SBSDs and MSBSPs (as defined in
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, 80 FR at 48988 and discussed below
in section III.B. of this release), certain actions with respect to
specific provisions of the business conduct standards will not
provide a basis for a Commission enforcement action. See Commission
Statement on Certain Provisions of Business Conduct Standards for
Security-Based Swap Dealers and Major Security-Based Swap
Participants, Exchange Act Release No. 84511 (Oct. 31, 2018), 83 FR
55486 (Nov. 6, 2018) (``Statement on Business Conduct Standards'').
To the extent SBSDs and MSBSPs rely on the statement, the Commission
encourages them to maintain records of the written representations
described in the statement until such time as the statement is no
longer in force.
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b. Additional Amendments to Rule 17a-3 and Modifications to Rule 18a-5
    The Commission proposed several amendments to Rule 17a-3 to
eliminate obsolete text, improve readability, and modernize
terminology. The Commission received no comments addressing these
proposed amendments and, as discussed below, is adopting them
substantially as proposed.
    Reference is made throughout Rule 17a-3 to ``members'' of a
national securities exchange as a distinct class of registrant in
addition to ``brokers'' and ``dealers.'' The Commission proposed to
remove these references to ``members'' given that the rule applies to
brokers-dealers, which would include members of a national securities
exchange that are brokers-dealers.\118\ The rule being adopted does not
remove these references to ``members'' to avoid confusion as to whether
their removal resulted in a substantive change to the rule.
---------------------------------------------------------------------------

    \118\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25209.
---------------------------------------------------------------------------

    The Commission is adopting a global change to replace the word
``shall'' in the rule with the word ``must'' or ``will'' where
appropriate.\119\ Similarly, when defining terms, the Commission is
replacing the phrase ``shall mean'' with the word ``means.'' \120\ The
Commission is also adopting certain stylistic, corrective, and
punctuation amendments to improve the rule's readability.\121\ The
Commission is

simplifying the text in paragraph (a) of Rule 17a-3 to state that Rule
17a-3 applies to ``every broker or dealer,'' since the newly adopted
undesignated introductory paragraph already provides sufficient detail
as to the types of registrants to which the rule applies.\122\ In
recognition of the fact that broker-dealers may execute orders for non-
customers, the Commission is amending paragraph (a)(6) of Rule 17a-3 to
specify that a broker-dealer must maintain a copy of the customer's or
non-customer's subscription agreement.\123\
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    \119\ The amendments replace the word ``shall'' with the word
``must'' or ``will'' in the following paragraphs of Rule 17a-3, as
amended: (a) Introductory text, (a)(6)(i)(A), (a)(7)(i), (a)(10) and
(11), (a)(12)(i), (a)(16)(ii), (a)(17)(i), (a)(18)(i), (a)(19)(i),
(b), (d), (e), and (f).
    \120\ The amendments replace the phrase ``shall mean'' with the
word ``means'' in the following paragraphs of Rule 17a-3, as
amended: (a)(6)(i)(A) and (a)(16)(ii)(A) and (B).
    \121\ The Commission is adopting the following stylistic and
corrective changes to Rule 17a-3, as amended: (1) Adding to
paragraph (a)(1) the phrase ``such securities were''; (2) adding to
paragraph (a)(4)(vi) the word ``and'' after the semicolon; (3)
replacing the word ``of'' with the word ``or'' in paragraph (a)(5),
resulting in the phrase ``for its account or for the account of its
customers or partners''; (4) replacing the phrase ``purchase or sale
of securities'' with the phrase ``purchase or sale of a security''
in the first sentence of paragraph (a)(6)(i); (5) replacing the word
``and'' with the word ``or'' in paragraph (a)(7), resulting in the
phrase ``A memorandum of each purchase or sale''; (6) replacing the
phrase ``in respect of'' with the phrase ``with respect to'' in
paragraph (a)(9); (7) adding the phrase ``, as applicable:'' After
the word ``indicating'' in paragraph (a)(9); (8) including the word
``and'' between the second-to-last and last subparagraphs of
paragraph (a)(9) (instead of after every subparagraph); (9)
replacing cross-reference in paragraph (a)(12) to ``paragraph
(h)(4)'' with a cross-reference to ``paragraph (f)(4)'' due to the
proposed deletion of two paragraphs; (10) amending paragraph
(a)(12)(i)(G) to refer to a ``broker or dealer'' instead of a
``broker-dealer''; (11) replacing the superfluous ``or'' with a
comma in the phrase ``wrongful taking of property or bribery'' in
paragraph (a)(12)(i)(G); (12) clarifying in paragraph (a)(1) that
the unit and aggregate purchase or sale price, if any includes the
financial terms for security-based swaps; (13) replacing ``,'' with
``;'' after the phrase ``a notation of that entry'' in paragraph
(a)(6)(i)(A) for consistency with 17 CFR 240.17a-3(a)(6)(i)(A) and
paragraph (b)(4) of Rule 18a-5, as adopted; (14) replacing ``In the
case of'' with ``For each'' in paragraph (a)(9)(iv) for consistency
with paragraphs (a)(7) and (b)(7) of Rule 18a-5, as adopted; (15)
adding quotation marks around the term ``associated person'' in
paragraph (a)(12)(i) for consistency with paragraph (a)(12)(i) of
Rule 17a-3 and paragraphs (a)(10)(i) and (b)(8)(i) of Rule 18a-5, as
adopted; (16) replacing ``or any broker or dealer'' with ``, or any
broker, dealer, security-based swap dealer or major security-based
swap participant'' in paragraph (a)(12)(i)(F) for consistency with
paragraphs (a)(10)(i)(F) and (b)(8)(i)(F) of Rule 18a-5, as adopted;
(17) adding ``, or'' after the phrase ``wrongful taking of
property'' in paragraph (a)(12)(i)(G) for consistency with paragraph
(a)(12)(i)(G) of Rule 17a-3 and paragraphs (a)(10)(i)(G) and
(b)(8)(i)(G) of Rule 18a-5, as adopted; (18) replacing ``17 CFR
240.17a-3'' with ``this section'' in paragraph (b)(v); and (19)
replacing ``Sec. Sec.  240.17a-3 and 17a-4'' with ``this section and
Sec.  240.17a-4'' in paragraph (b).
    \122\ See undesignated introductory paragraph of Rule 17a-3, as
amended.
    \123\ See paragraph (a)(6) of Rule 17a-3, as amended.
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    The Commission is restructuring paragraph (a)(11) of Rule 17a-3 to
eliminate paragraphs (a)(11)(i) and (ii).\124\ Under these amendments,
the text formerly located in paragraph (a)(11)(i) of Rule 17a-3 is set
forth in the second sentence of paragraph (a)(11) of Rule 17a-3, as
amended, and the text of paragraph (a)(11)(ii) has been deleted from
the rule. The Commission proposed to amend the ``Provided, however''
paragraph in paragraph (a)(12) of Rule 17a-3 that follows paragraph
(a)(12)(i)(H) by replacing the list of entities enumerated in the
paragraph with the term ``a self-regulatory organization.'' \125\ The
Commission is amending the paragraph substantially as proposed but
adding the phrase ``a registered national securities association or a
registered national securities exchange'' rather than the term ``a
self-regulatory organization'' in order to more accurately reflect the
nature of the entities listed in the paragraph prior to these
amendments. The Commission is also redesignating this paragraph as
paragraph (a)(12)(i)(I) of Rule 17a-3.
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    \124\ See paragraph (a)(11) of Rule 17a-3, as amended.
    \125\ See paragraph (a)(12) of Rule 17a-3, as amended.
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    As discussed in more detail in section II.E.1. of this release, the
Commission is adopting a limited alternative compliance mechanism in
Rules 17a-3 and 18a-5.\126\ The provisions of the limited alternative
compliance mechanism are in paragraph (b) of Rule 17a-3 and in
paragraph (c) of Rule 18a-5. As a result, the Commission is
redesignating paragraphs (b) through (g) of Rule 17a-5 as paragraphs
(c) through (g) and is redesignating proposed paragraph (c) of Rule
18a-5 as paragraph (d).
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    \126\ See paragraph (b) of Rule 17a-3, as amended; paragraph (c)
of Rule 18a-5, as adopted.
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    The Commission also is amending paragraph (b) of Rule 17a-3 (and,
as mentioned above, is redesignating it as paragraph (c)). Paragraph
(b)(1) was designed to avoid duplication so that an introducing broker-
dealer will not be required to make and keep current the same records
that would customarily be made by the firm's clearing broker-dealer.
However, the language in paragraph (b)(1) beginning with the phrase
``Provided, That'' is outdated insofar is it references a capital
standard that has been superseded, and the Commission is deleting it
accordingly. In revising paragraph (b)(1), the intent of the
provision--to avoid the duplicative creation of records related to
transactions introduced by one broker or dealer and cleared by a
different broker or dealer--remains the same. However, the Commission
is eliminating the outdated capital standard reference.\127\ The
Commission is also deleting paragraph (b)(2), as it would be redundant
of paragraph (b) of Rule 17a-3, as amended.
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    \127\ Paragraph (c) of Rule 17a-3, as amended, provides that a
broker or dealer registered pursuant to Section 15 of the Act, that
introduces accounts on a fully-disclosed basis, is not required to
make or keep such records of transactions cleared for such broker or
dealer as are made and kept by a clearing broker or dealer pursuant
to the requirements of Sec. Sec.  240.17a-3 and 240.17a-4. Nothing
herein will be deemed to relieve such broker or dealer from the
responsibility that such books and records be accurately maintained
and preserved as specified in Sec. Sec.  240.17a-3 and 240.17a-4.
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    The Commission is deleting paragraphs (c) and (d) of Rule 17a-3.
Paragraph (c) references instruments such as U.S. Defense Savings
Stamps and U.S. Defense Savings Bonds that are no longer widely
circulated and thus a specific carve-out for these instruments from the
general rule set forth in paragraph (a) of Rule 17a-3 is no longer
appropriate.\128\ Paragraph (d) provides a de minimis exception from
paragraph (a) of Rule 17a-3 for any cash transaction of $100 or less
involving only subscription rights or warrants which by their terms
expire within 90 days after their issuance. This exception was adopted
in 1953 to reduce the burden and expense of making accounting entries
for these transactions. The burden associated with these accounting
entries is no longer significant in light of the technological advances
in recordkeeping systems since 1953.\129\ In addition, the removal of
this exception will affect only a small number of transactions. As a
consequence of the removal of paragraphs (c) and (d) from Rule 17a-3,
paragraphs (e), (f), (g), and (h) are being redesignated as paragraphs
(d), (e), (f), and (g), respectively.
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    \128\ The Defense Savings Bond initiated by the U.S. Treasury
and the U.S. Defense Savings Stamps introduced by the U.S. Postal
Service were measures to finance the U.S. effort in World Wars I and
II. The bonds matured in 10 years from the date of issuance. The
Defense Savings Bonds were replaced by Series E savings bonds, which
ceased to be issued as of June 1980. Today, these instruments are
not widely held and are valued more as collectibles than for their
face value. See information available at www.treasurydirect.gov.
    \129\ See Preservation of Records and Reports of Certain
Stabilizing Activities, 18 FR 2879 (May 19, 1953) (``It has been
pointed out to the Commission that the accounting entries
appropriate in the case of the usual securities transaction are
unnecessarily burdensome and expensive as to these rights
transactions because of the small sums involved and because in many
cases there is no continuing relationship between the customer and
the firm'').
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    Paragraph (e) of Rule 17a-3 references Municipal Securities
Rulemaking Board (``MSRB'') Rule G-8 and states that compliance with
that rule will be deemed to be compliance with this section. The
Commission is adding the phrase ``or any successor rule'' to the
reference to Rule G-8 so that the reference does not become superseded
over time.
    The Commission also made a number of non-substantive modifications
to the text of Rule 18a-5 in addition to the modifications discussed
above in section II.A.2.a. of this release.\130\
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    \130\ In particular, the Commission made the following changes
to Rule 18a-5, as adopted: (1) Removing ``such'' from the phrase
``Each such security-based swap dealer'' in paragraph (a) for
consistency with paragraph (b) of Rule 18a-5, as adopted; (2)
replacing ``if any contract price'' with ``if any (including the
financial terms for security-based swaps)'' in paragraph (a)(1) for
consistency with paragraph (b)(1) of Rule 18a-5, as adopted; (3)
adding ``such securities were'' before the phrase ``purchase or
received or to whom sold or delivered'' in paragraphs (a)(1) and
(b)(1) for consistency with paragraph (a)(1) of Rule 17a-3, as
amended; (4) replacing ``purchase or sale'' with ``transactions'' in
the third sentence of paragraphs (a)(1) and (b)(1) for consistency
with paragraph (a)(1) of Rule 17a-3, as amended; (5) replacing ``the
termination or maturity date'' with ``the scheduled termination
date'' in paragraphs (a)(1), (3), and (5) and (b)(1), (2), and (4)
for consistency with paragraph (a)(1) of Rule 17a-3, as amended; (6)
replacing the phrase ``the notional amount'' with ``the notional
amount(s) and the currenc(ies) in which the notional amount(s) is
expressed'' in paragraphs (a)(1), (3), and (5) and (b)(1), (2), and
(4) for consistency with paragraph (a)(1) of Rule 17a-3, as amended;
(7) adding ``counterparty's'' before the phrase ``legal entity
identifier'' in paragraphs (a)(1), (3), (5), and (15) and (b)(1),
(2), (4), and (11) for consistency with paragraph (a)(1) of Rule
17a-3, as amended; (8) removing ``,'' after ``expense'' in paragraph
(a)(2) for consistency with paragraph (a)(2) of Rule 17a-3, as
amended; (9) adding ``(including security-based swaps) after the
phrase ``deliveries of securities'' in paragraphs (a)(3) and (b)(2)
for consistency with paragraph (a)(3) of Rule 17a-3, as amended;
(10) replacing ``,'' with ``;'' after the phrase ``all other debits
and credits to such account'' in paragraph (a)(3) for consistency
with paragraph (a)(3) of Rule 17a-3, as amended; (11) replacing ``in
the case of security-based swap'' with ``for a security-based
swaps'' in paragraph (a)(3) for consistency with paragraph (a)(3) of
Rule 17a-3, as amended, and paragraph (b)(2) of Rule 18a-5, as
adopted; (12) removing ``ledger accounts (or other records)
itemizing separately,'' in paragraph (a)(3) for consistency with
paragraph (a)(3) of Rule 17a-3, as amended, and paragraph (b)(2) of
Rule 18a-5, as adopted; (13) replacing ``subject'' with ``subjects''
in paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of
Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as
adopted; (14) adding ``for'' before the phrase ``the account of its
customers'' in paragraph (a)(4)(i) for consistency with paragraph
(a)(5)(i) of Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule
18a-5, as adopted; (15) replacing ``locations'' with ``location'' in
paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of Rule
17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as
adopted; (16) removing the ``,'' after the phrase ``in all cases''
in paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of
Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as
adopted; (17) replacing ``Sec.  240.15Fi-1'' with ``Sec.  240.15Fi-
2'' in paragraphs (a)(6) and (15) and (b)(11) to reflect a change in
reference; (18) replacing ``security-based swap dealer, major
security-based swap participant'' with ``security-based swap dealer
or major security-based swap participant'' in paragraphs (a)(10)(ii)
and (b)(8)(ii) for grammatical correctness and internal consistency;
(19) removing ``,'' after ``Sec.  240.15Fh-5'' in paragraph (a)(17)
for consistency with paragraph (a)(30) of Rule 17a-3, as amended,
and paragraph (b)(13) of Rule 18a-5, as adopted; (20) replacing ``a
security-based swap dealer or a major security based swap
participant'' with ``such'' in paragraph (b)(1) for clarity; (21)
replacing ``if any (includes the contract price for security-based
swaps)'' with ``(if any, including the financial terms for security-
based swaps)'' in paragraph (b)(1) for consistency with paragraph
(a)(1) of Rule 17a-3, as amended; (22) replacing ``and in addition,
for security-based swaps'' with ``and in addition, for a security-
based swap'' in paragraph (b)(2) for consistency with paragraph
(a)(3) of Rule 17a-3, as amended, and paragraph (a)(3) of Rule 18a-
5, as adopted; (23) replacing ``the time of cancellation, if
applicable'' with ``the time of execution or cancellation'' in
paragraph (b)(4) for consistency with paragraph (a)(6)(i)(A) in Rule
17a-3, as adopted; (24) changing the fourth sentence in paragraph
(b)(4) to read ``An order entered pursuant to the exercise of
discretionary authority by the security-based swap dealer or major
security-based swap participant, or associated person thereof, must
be so designated.'' for consistency with paragraph (a)(6)(i)(A) in
Rule 17a-3, as adopted; (25) adding a citation to 15 U.S.C.
78c(a)(70) to paragraph (c)(1) for internal consistency; (26)
replacing ``The term, as to a person supervised by a prudential
regulator,'' in paragraph (c)(2) with ``The term associated person,
as to an entity supervised by a prudential regulator'' to clarify
that the term referenced in the paragraph is ``associated person'';
(27) adding parentheses around the phrase ``if any, including the
financial terms for security-based swaps'' in paragraph (b)(1) for
consistency with paragraph (a)(1) of Rule 17a-3, as amended; (28)
replacing ``will'' with ``does'' in paragraph (h)(4) of Rule 17a-3,
as amended, for consistency with Section 3(a)(70) of the Exchange
Act; and (29) consolidating paragraphs (a)(19) and (b)(15) and
designating it paragraph (c) and redesignating paragraph (c) as
paragraph (d).

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3. Record Maintenance and Preservation Requirements
    Rule 17a-4 requires a broker-dealer to preserve certain types of
records if it makes or receives them. The rule also prescribes the time
period that these records and the records required to be made and kept
current under Rule 17a-3 must be preserved and the manner in which they
must be preserved. The Commission is adopting amendments to Rule 17a-4
that are designed to account for the security-based swap activities of
broker-dealers, including broker-dealer SBSDs and MSBSPs.\131\ The
Commission also is adopting a number of largely technical amendments to
Rule 17a-4. The Commission is adopting Rule 18a-6--which is modeled on
Rule 17a-4, as amended--to establish record maintenance and
preservation requirements for stand-alone and bank SBSDs and MSBSPs.
Rule 18a-6 does not include a parallel requirement for every
requirement in Rule 17a-4.\132\ In addition, the recordkeeping
requirements in Rule 18a-6 applicable to bank SBSDs and MSBSPs are more
limited in scope than the requirements in the rule applicable to stand-
alone SBSDs and MSBSPs.
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    \131\ Broker-dealer SBSDs and MSBSPs are subject to all the
record maintenance and preservation requirements applicable to
broker-dealers under Rule 17a-4, as amended, plus the additional
requirements specifically applicable only to SBSDs and MSBSPs.
    \132\ The Commission did not propose to include in Rule 18a-6
requirements that would parallel the requirements in paragraphs
(b)(11), (g), (h), (k), and (l) of Rule 17a-4, as amended. These
requirements relate to activities that would not be relevant to
stand-alone SBSDs or MSBSPs. Other requirements in Rule 17a-4, as
amended, not included as parallel requirements in Rule 18a-6, as
adopted, are discussed below.
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a. Rule 17a-4 and Rule 18a-6
Undesignated Introductory Paragraph
    The Commission proposed adding an undesignated introductory
paragraph to Rule 17a-4 explaining that the rule applies to a broker-
dealer, including a broker-dealer SBSD or MSBSP, while a stand-alone or
bank SBSD or MSBSP is subject to Rule 18a-6.\133\ Similarly, the
Commission proposed an undesignated introductory paragraph to Rule 18a-
6 explaining that the rule would apply to a stand-alone or bank SBSD or
MSBSP, while a broker-dealer SBSD or MSBSP is subject to Rule 17a-4.
The Commission received no comments on the proposed undesignated
introductory paragraphs to Rules 17a-4 and 18a-6 and is adopting them
with non-substantive modifications to clarify which rule (17a-4 or 18a-
6) applies to a given type of entity.\134\
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    \133\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25211.
    \134\ See undesignated introductory paragraph of Rule 17a-4, as
amended; undesignated introductory paragraph of Rule 18a-6, as
adopted.
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Six Year Preservation Requirement for Certain Rule 17a-3 and Rule 18a-5
Records
    Paragraph (a) of Rule 17a-4 provides that brokers-dealers subject
to Rule 17a-3 must preserve for a period of not less than six years,
the first two years in an easily accessible place, certain categories
of records required to be made and kept current under Rule 17a-3 (the
``six year preservation requirement'').\135\ Consequently, under this
existing requirement, broker-dealer SBSDs and MSBSPs are required to
preserve for six years the same categories of records as stand-alone
broker-dealers. As discussed above, paragraphs (a) and (b) of Rule 18a-
5 contain certain recordkeeping requirements that parallel existing
requirements in Rule 17a-3, as amended. Under these parallel
requirements, stand-alone and bank SBSDs and MSBSPs must make and keep
current certain categories of records that broker-dealers must maintain
pursuant to the six year preservation requirement in Rule 17a-4.
Consequently, as proposed, paragraphs (a)(1) and (2) of Rule 18a-6
would require that these categories of records must be preserved for a
period of not less than six years, the first two years in an easily
accessible place.\136\ The Commission received no comments on

paragraphs (a)(1) and (2) of proposed Rule 18a-6 and is adopting them
as proposed.\137\
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    \135\ Specifically, the six-year preservation requirement
applies to records required under paragraphs (a)(1) through (3),
(5), (21), and (22) of Rule 17a-3, as amended.
    \136\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25211-12.
    \137\ See paragraphs (a)(1) and (2) of Rule 18a-6, as adopted.
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Three Year Preservation Requirement for Certain Rule 17a-3 and Rule
18a-5 Records
    Paragraph (b)(1) of Rule 17a-4 provides that broker-dealers subject
to Rule 17a-3 must preserve for at least three years, the first two
years in an easily accessible place, certain records required to be
made and kept current under Rule 17a-3 (the ``three year preservation
requirement'').\138\ The Commission did not propose to amend or change
any of the existing cross-references to Rule 17a-3 in paragraph (b)(1)
of Rule 17a-4. The Commission did, however, propose adding cross-
references to certain new paragraphs that are being added to Rule 17a-3
to address security-based swap activities of broker-dealers, including
broker-dealer SBSDs and MSBSPs.\139\ As discussed above, paragraphs (a)
and (b) of Rule 18a-5 require stand-alone and bank SBSDs and MSBSPs
make and keep current certain categories of records that broker-dealers
must maintain pursuant to the three year preservation requirement, as
amended to incorporate the new records relating to security-based swap
activities. Consequently, as proposed, paragraphs (b)(1) and (2) of
Rule 18a-6 would similarly require that these categories of records be
preserved for a period of not less than three years, the first two
years in an easily accessible place. The Commission received no
comments on these proposed preservation requirements and is adopting
them substantially as proposed.\140\
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    \138\ Specifically, paragraph (b)(1) of Rule 17a-4 applies the
three-year preservation requirement to the records required to be
made and kept current under paragraphs (a)(4), (6) through (10),
(16), and (18) through (20) and (e) of Rule 17a-3, as amended. Prior
to these amendments, Rule 17a-4 did not cross-reference paragraph
(a)(11) of Rule 17a-3. The Commission is correcting this omission by
adding a cross reference to paragraph (a)(11) of Rule 17a-3 in
paragraph (b)(1) of Rule 17a-4, as amended. This requires broker-
dealers to preserve these records for three years, the first two
years in an easily accessible place. Based on staff experience, the
Commission believes that broker-dealers have been preserving these
records in a manner consistent with this requirement.
    \139\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25212.
    \140\ See paragraph (b)(1) of Rule 17a-4, as amended; paragraphs
(b)(1) and (2) of Rule 18a-6, as adopted. The Commission is adopting
the following stylistic and corrective changes: (1) Removing the
reference to paragraph (a)(24) of Rule 17a-3 since that paragraph is
not being adopted as proposed; (2) replacing ``made pursuant to
paragraphs Sec.  240.18a-5(a)(1), (a)(2), (a)(3), and (a)(4)'' with
``made pursuant to Sec.  240.18a-5(a)(1) through (4)'' in paragraph
(a)(1) of Rule 18a-6, as adopted, for grammatical correctness; (3)
replacing ``made pursuant to paragraphs Sec.  240.18a-5(b)(1),
(b)(2), and (b)(3)'' with ``made pursuant to Sec.  240.18a-5(b)(1)
through (3)'' in paragraph (a)(2) of Rule 18a-6, as adopted, for
grammatical correctness; (4) replacing ``;'' with ``.'' for each
paragraph in Rule 18a-6, as adopted, for internal consistency; (5)
removing ``as applicable'' in paragraph (b)(1)(viii) of Rule 18a-6,
as adopted, as it is not necessary since only Part II is referenced
in Rule 18a-6, as adopted; (6) replacing ``security-based swap
customers'' with ``non-security-based swap customers'' in paragraph
(b)(1)(viii)(B) of Rule 18a-6, as adopted, to correct an error and
for consistency with paragraph (b)(8)(ii) of Rule 17a-4, as amended;
(7) removing ``,'' after ``cost'' in paragraph (b)(1)(viii)(H) of
Rule 18a-6, as adopted, for consistency with paragraph (b)(8)(ix) of
Rule 17a-4, as amended; (8) removing ``;'' after ``and'' in
paragraph (b)(1)(viii)(N) of Rule 18a-6, as adopted, for consistency
with paragraph (b)(8)(xvi) of Rule 17a-4, as amended; (9) removing
``Records which contain'' in paragraph (b)(2)(v) of Rule 18a-6, as
adopted, for clarity; and (10) replacing ``; and'' with ``.'' in
paragraph (b)(2)(vii) of Rule 18a-6, as adopted, for internal
consistency.
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Three Year Preservation Requirement for Certain Other Records
    Paragraphs (b)(2) through (13) of Rule 17a-4 also provide that a
broker-dealer subject to Rule 17a-3 must preserve for a period of not
less than three years, the first two years in an easily accessible
place, other categories of records if the broker-dealer makes or
receives the record. These are not categories of records a broker-
dealer is required to make and keep current under Rule 17a-3 but rather
types of records that a broker-dealer may make or receive in the
ordinary course of business. As discussed in more detail below, the
Commission proposed to amend certain of the provisions in paragraphs
(b)(2) through (13) of Rule 17a-4 to account for security-based swaps
and to require that broker-dealers, including broker-dealer SBSDs and
MSBSPs, preserve certain additional records related to security-based
swap activities.\141\ Further, as discussed below, the Commission
proposed requirements in paragraph (b) of Rule 18a-6 that would require
stand-alone and bank SBSDs and MSBSPs to preserve similar records.
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    \141\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25212-13.
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    In addition, the categories of records identified in paragraphs
(b)(3) through (5) and (7) of Rule 17a-4 must be retained only if they
relate to the broker-dealer's business as such (i.e., business as a
broker-dealer). Security-based swap activities of a broker-dealer that
is not registered as an SBSD or MSBSP are part of the broker-dealer's
business as such for the purposes of Rule 17a-4 just like activities
relating to other types of securities. In the case of a broker-dealer
SBSD or MSBSP, the Commission proposed to amend Rule 17a-4 to clarify
that the business as such of these entities would include the firm's
business as an SBSD or MSBSP.\142\ The Commission received no comment
on the proposed definition and is adopting it substantially as
proposed.\143\
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    \142\ See Recordkeeping and Reporting Proposing Release, 79 FR
at 25213.
    \143\ See paragraph (m)(5) of Rule 17a-4, as amended. The
definition as adopted is shorter than proposed to improve clarity
and now reads: ``[t]he term business as such includes security-based
swap activity.''
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Bank Records
    Paragraph (b)(2) of Rule 17a-4 requires a broker-dealer, including
a broker-dealer SBSD or MSBSP, to preserve all check books, bank
statements, cancelled checks, and cash reconciliations. The Commission
did not propose to amend this paragraph to specifically account for
security-based swaps. However, the Commission did propose a parallel
requirement in Rule 18a-6 applicable to stand-alone SBSDs and
MSBSPs.\144\ The Commission received no comments on this proposed bank