The market for broker-dealer services encompasses a relatively
small set of large and medium sized broker-dealers and thousands of
smaller broker-dealers competing for niche or regional segments of the
market.\119\ The market for broker-dealer services includes many
different markets for a variety of services related to the securities
business, including (1) managing orders for customers and routing them
to various trading venues; (2) providing advice to customers that is in
connection with and reasonably related to their primary business of
effecting securities transactions; (3) holding customers' funds and
securities; (4) handling clearance and settlement of trades; (5)
intermediating between customers and carrying/clearing brokers; (6)
dealing in corporate debt and equities, government bonds, and municipal
bonds, among other securities; (7) privately placing securities; and
(8) effecting transactions in mutual funds that involve transferring
funds directly to the issuer. Some broker-dealers may specialize in
just one narrowly defined service, while others may provide a wide
variety of services.
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    \119\ See Regulation Best Interest Adopting Release, 84 FR at
33406. For simplification, the Commission presents this analysis as
if the market for broker-dealer services encompasses one broad
market with multiple segments, even though, in terms of competition,
it could also be discussed in terms of numerous interrelated
markets.
---------------------------------------------------------------------------

    Based on an analysis of FOCUS filings as of December 2020, there
were approximately 3,551 registered broker-dealers with over 186
million customer accounts.\120\ In total, these broker-dealers have
over $5 trillion in total assets as reported on Form X-17A-5.\121\ More
than two-thirds of all broker-dealer assets and more than one-third of
all customer accounts are held by the 19 largest broker-dealers, as
shown in Table 1.\122\ Of the broker-dealers registered with the
Commission as of December 2020, 502 broker-dealers were dually
registered as investment advisers.\123\
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    \120\ The data is obtained from FOCUS filings as of December
2020. There may be a double-counting of customer accounts among, in
particular, the larger broker-dealers as they may report introducing
broker-dealer accounts as well in their role as clearing broker-
dealers. Customer Accounts includes both broker-dealer and
investment adviser accounts for dual-registrants.
    \121\ Assets are estimated by Total Assets (allowable and non-
allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II
and Part IIA, available at https://www.sec.gov/files/formx-17a-5_2.pdf) and correspond to balance sheet total assets for the
broker-dealer. The Commission does not have an estimate of the total
amount of customer assets for broker-dealers because that
information is not included in FOCUS filings. The Commission
estimates broker-dealer size from the total balance sheet assets as
described above.
    \122\ Approximately $4.97 trillion of total assets of broker-
dealers (98.7%) are at broker-dealers with total assets in excess of
$1 billion.
    \123\ This estimate includes the number of broker-dealers who
are also registered as state investment advisers.

                             Table 1--Registered Broker-Dealers as of December 2020
----------------------------------------------------------------------------------------------------------------
                                                                     Number of                      Cumulative
                                                   Total number       dually        Cumulative       number of
      Size of broker-dealer (total assets)            of BDs      registered BDs   total assets      customer
                                                                         *            ($ bln)        accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................              19              10           3,450      67,178,360
$1 billion to $50 billion.......................             122              24           1,519     107,003,611
$500 million to $1 billion......................              25               5              17         639,425
$100 million to $500 million....................             129              31              27         932,529
$10 million to $100 million.....................             507              98              18       9,771,667
$1 million to $10 million.......................           1,047             194             3.7         383,646
<$1 million.....................................           1,702             140             0.5          13,481
                                                 ---------------------------------------------------------------
    Total.......................................           3,551             502           5,036     185,922,719
----------------------------------------------------------------------------------------------------------------
* For purposes of this table, a dually registered broker-dealer is registered with either the Commission or a
  state as an investment adviser and a broker-dealer.

    The Commission preliminarily estimates that 45 broker-dealers may
be dually registered with the CFTC as futures commission merchants as
of December 31, 2020.\124\
---------------------------------------------------------------------------

    \124\ Using FOCUS Report data as of December 31, 2020, there are
45 broker-dealers that report commodity futures account activity in
``Part II: Customer's Regulated Commodity Futures Accounts.''
---------------------------------------------------------------------------

    In addition to the above estimates of affected broker-dealers,
over-the-counter (``OTC'') derivatives dealers will also be

affected by the proposed recordkeeping amendments. The Commission
estimates that 5 registered OTC derivatives dealers will be impacted by
the proposed amendments to Rule 17a-4.
2. Security-Based Swap Markets: Activity and Participants
i. Available Data From the Security-Based Swap Market
    The Commission's understanding of the market is informed, in part,
by available data on security-based swap transactions, though the
Commission acknowledges that limitations in the data limit the extent
to which it is possible to quantitatively characterize the market.\125\
Since this data does not cover the entire market, the Commission has
analyzed market activity using a sample of transactions that includes
only certain segments of the market. The Commission believes, however,
that the data underlying this analysis provides reasonably
comprehensive information regarding single-name credit default swap
(``CDS'') transactions and the composition of the participants in the
single-name CDS market.
---------------------------------------------------------------------------

    \125\ The Commission also relies on qualitative information
regarding market structure and evolving market practices provided by
commenters and the knowledge and expertise of Commission staff.
---------------------------------------------------------------------------

    The Commission's analysis of the current state of the security-
based swap market is based on data obtained from the Depositary Trust &
Clearing Corporation (``DTCC'') Derivatives Repository Limited Trade
Information Warehouse (``TIW''), especially data regarding the activity
of market participants in the single-name CDS market during the period
from 2008 to 2021.\126\ Although the definition of security-based swaps
is not limited to single-name CDS,\127\ the Commission believes that
the single-name CDS data is sufficiently representative of the market
to inform our analysis of the current security-based swap market.
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    \126\ In prior releases, the Commission has examined data for
other time periods. For example, in the business conduct standards
adopting release, the Commission presented an analysis of TIW data
for November 2006 through December 2014. While the exact numbers of
various groups of transacting agents and account holders in that
analysis differ from the figures reported in this section (for a
longer time period), the Commission does not observe significant
structural differences in market participation. Compare 81 FR at
30102 (Tables 1 and 2), with Tables 1 and 2 below.
    \127\ While other repositories may collect data on transactions
in total return swaps on equity and debt, the Commission does not
currently have access to such data for these products (or other
products that are security-based swaps). Additionally, the
Commission explains below that data related to single-name CDS
provides reasonably comprehensive information for the purpose of
this analysis.
---------------------------------------------------------------------------

    According to data published by the Bank for International
Settlements (``BIS''), the global notional amount outstanding in
single-name CDS was approximately $3.5 trillion,\128\ in multi-name
index CDS was approximately $4.5 trillion, and in multi-name, non-index
CDS was approximately $347 billion.\129\ The total gross market value
outstanding in single-name CDS was approximately $77 billion, and in
multi-name CDS instruments was approximately $125 billion.\130\ The
global notional amount outstanding in equity forwards and swaps as of
December 2020 was $3.6 trillion, with total gross market value of $321
billion.\131\
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    \128\ The global notional amount outstanding represents the
total face amount used to calculate payments under outstanding
contracts. The gross market value is the cost of replacing all open
contracts at current market prices.
    \129\ See BIS, Semi-annual OTC derivatives statistics at
December 2020, Table D5.2, available at https://stats.bis.org/statx/srs/table/d5.2 (accessed Aug. 18, 2021).
    \130\ See id.
    \131\ These totals include swaps and security-based swaps, as
well as products that are excluded from the definition of ``swap,''
such as certain equity forwards. See OTC, equity-linked derivatives
statistics, Table D5.1, available at https://stats.bis.org/statx/srs/table/d5.1 (accessed Aug. 18, 2021). For the purposes of this
analysis, the Commission assumes that multi-name index CDS are not
narrow-based index CDS and therefore, do not fall within the
security-based swap definition. See 15 U.S.C. 78c(a)(68)(A); see
also Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, 77 FR 48208. The Commission also assumes
that all instruments reported as equity forwards and swaps are
security-based swaps, potentially resulting in underestimation of
the proportion of the security-based swap market represented by
single-name CDS. Therefore, when measured on the basis of gross
notional outstanding single-name CDS contracts appear to constitute
roughly 49% of the security-based swap market. Although the BIS data
reflects the global OTC derivatives market, and not just the U.S.
market, the Commission has no reason to believe that these ratios
differ significantly in the U.S. market.
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ii. Affected SBS Entities
    Final SBS Entity registration rules have been adopted and
compliance was required as of November 1, 2021.\132\ As of November 9,
2021, there are 41 entities registered with the Commission as SBSDs,
and no entities have registered as MSBSPs.\133\
---------------------------------------------------------------------------

    \132\ See Key Dates for Registration of Security-Based Swap
Dealers and Major Security-Based Swap Participants, available at:
https://www.sec.gov/page/key-dates-registration-security-based-swap-dealers-and-major-security-based-swap-participants.
    \133\ See section V.C. of this release (discussing the number of
SBS Entities that would be subject to the proposed rules).
---------------------------------------------------------------------------

    Firms that act as dealers play a central role in the security-based
swap market. Based on an analysis of 2020 single-name CDS data in TIW,
accounts of dealers intermediated transactions with a gross notional
amount of approximately $1.99 trillion, with approximately 55 percent
of the gross notional intermediated by the top five dealer
accounts.\134\
---------------------------------------------------------------------------

    \134\ The Commission staff analysis of TIW transaction records
indicates that approximately 99% of single-name CDS price-forming
transactions in 2020 involved an ISDA-recognized dealer.
---------------------------------------------------------------------------

iii. Other Markets and Dual Registrants
    The numerous financial markets are integrated, often attracting the
same market participants that trade across corporate bond, swap, and
security-based swap markets, among others. For example, persons who
will register as SBS Entities are likely also to be engaged in swap
activity. In part, this overlap reflects the relationship between
single-name CDS contracts, which are security-based swaps, and index
CDS contracts, which may be swaps or security-based swaps. A single-
name CDS contract covers default events for a single reference entity
or reference security. Index CDS contracts and related products make
payouts that are contingent on the default of index components and
allow participants in these instruments to gain exposure to the credit
risk of the basket of reference entities that comprise the index, which
is a function of the credit risk of the index components. A default
event for a reference entity that is an index component will result in
payoffs on both single-name CDS written on the reference entity and
index CDS written on indices that contain the reference entity. Because
of this relationship between the payoffs of single-name CDS and index
CDS products, prices of these products depend upon one another,\135\
creating hedging opportunities across these markets.
---------------------------------------------------------------------------

    \135\ ``Correlation'' typically refers to linear relationships
between variables; ``dependence'' captures a broader set of
relationships that may be more appropriate for certain swaps and
security-based swaps. See, e.g., George Casella & Roger L. Berger,
Statistical Inference 171 (2nd ed. 2002).
---------------------------------------------------------------------------

    These hedging opportunities mean that participants that are active
in one market are likely to be active in the other. Commission staff
analysis of approximately 4,149 TIW accounts that participated in the
market for single-name CDS in 2020 revealed that approximately 3,096 of
those accounts, or 75 percent, also participated in the market for
index CDS. Of the accounts that participated in both markets, data
regarding transactions in 2020 suggests that, conditional on an account
transacting in notional volume of index CDS in the top third of
accounts, the

probability of the same account landing in the top third of accounts in
terms of single-name CDS notional volume is approximately 61 percent;
by contrast, the probability of the same account landing in the bottom
third of accounts in terms of single-name CDS notional volume is only
11 percent.
    Of the 25 SBSDs subject to Rule 18a-6(e), 24 are dually registered
with the CFTC as swap dealers and are therefore subject to CFTC
requirements for entities registered with the CFTC as swap.\136\
Additionally, there are six SBSDs that are already or will be subject
to Rule 17a-4. Further, of 41 entities registered as SBSDs, 26 have a
prudential regulator.
---------------------------------------------------------------------------

    \136\ See section VI.F. of this release (discussing the CFTC's
electronic recordkeeping rules). See also section V.C. of this
release (discussing the number of SBSDs that would be subject to the
proposed rules).
---------------------------------------------------------------------------

3. Recordkeeping Practices of Market Participants
    Notwithstanding the Commission's 2003 and 2019 interpretations of
the WORM requirement (i.e., that it can be met with software solutions)
described above,\137\ the Commission understands that some affected
broker-dealers maintain electronic recordkeeping systems used daily for
business purposes and separate electronic recordkeeping systems used to
meet the WORM requirement. The Commission does not have data regarding
the number of affected broker-dealers that maintain separate electronic
recordkeeping systems for these purposes or data sufficient for the
Commission to evaluate the likelihood that affected broker-dealers
maintain separate electronic recordkeeping systems for business
purposes that do or do not satisfy the WORM requirement. As a result,
the Commission cannot estimate the frequency with which separate
electronic recordkeeping systems are maintained for these purposes.
---------------------------------------------------------------------------

    \137\ See sections I.B.1. and II.D. of this release (discussing
the interpretations and broker-dealers' response to them).
---------------------------------------------------------------------------

    The Commission understands that third-party vendors developed
software-based solutions designed to meet the WORM requirement of Rule
17a-4(f).\138\ However, affected broker-dealers do not commonly use
such record systems for business purposes: Broker-dealers have
explained to Commission staff that the electronic recordkeeping systems
used for business purposes are dynamic, updated constantly (e.g., with
each new transaction or position), and easily accessible for retrieving
records, whereas WORM databases are more akin to static ``snapshots''
of the records at a point in time and are less accessible for business
purposes. As discussed in more detail above, the Commission
preliminarily believes that affected broker-dealers generally deploy an
electronic recordkeeping system that serves no purpose other than to
hold records in a manner that meets the Commission's regulatory
requirements for electronic recordkeeping systems.\139\ The Commission
also believes that some affected SBS Entities currently have systems
complying with the electronic recordkeeping requirements under Rule
18a-6 as it presently stands, which does not include a WORM or audit-
trail requirement.\140\
---------------------------------------------------------------------------

    \138\ See, e.g., Global Relay, Global Relay Archive, available
at: https://www.globalrelay.com/gr-services/archive; Amazon,
Protecting data with Amazon S3 Object lock, available at: https://aws.amazon.com/blogs/storage/protecting-data-with-amazon-s3-object-lock/; Cohasset Associates, Compliance Assessment: Amazon Web
Services (AWS) Simple Storage Service (S3), available at: https://d1.awsstatic.com/r2018/b/S3-Object-Lock/Amazon-S3-Compliance-Assessment.pdf; Microsoft, Securities and Exchange Commission (SEC)
Rule 17a-4(f) United States, available at: https://docs.microsoft.com/en-us/compliance/regulatory/offering-sec-17a-4.
    \139\ See section II.D of this release (discussing broker-
dealers' use of WORM compliant electronic recordkeeping systems).
    \140\ As noted above in section II.D. of this release, it is the
Commission's understanding that electronic recordkeeping systems
used by nonbank SBS Entities as well as by broker-dealers for
business purposes can be configured to meet the audit-trail
requirement.
---------------------------------------------------------------------------

    As discussed above, a number of affected entities are dually
registered with the CFTC as swap dealers. Under the CFTC's electronic
recordkeeping rule, affected entities must configure their
recordkeeping systems and have policies and procedures governing those
systems that are designed to prevent records from being altered or
erased.

B. Benefits of the Proposed Amendments

    The proposed amendments are intended to modernize the SBS Entity
and broker-dealer recordkeeping rules given technological changes over
the last two decades. The Commission preliminarily believes that by
specifying that nonbank SBS Entities \141\ and broker-dealers may
satisfy their electronic recordkeeping obligations through the WORM
requirement or an audit-trail alternative, the proposed amendments may
result in nonbank SBS Entities or broker-dealers updating electronic
recordkeeping systems in ways that would lower compliance costs. For
example, nonbank SBS Entities or broker-dealers may, among other
things, reduce or eliminate duplicative compliance systems in
circumstances where they currently maintain separate electronic
recordkeeping systems primarily due to, as applicable, the WORM
requirement or Rule 18a-6(e)'s electronic storage system requirements.
The Commission expects that these reductions would primarily be
realized by broker-dealers that may, for example, choose to adopt a
single recordkeeping system that complies with the audit-trail
requirement--for business and regulatory purposes. Below, the
Commission estimates the reduction in initial and ongoing costs and
burdens related to these proposals.\142\
---------------------------------------------------------------------------

    \141\ With respect to SBS Entities, the proposal would limit the
electronic recordkeeping requirements to SBS Entities that do not
have a prudential regulator in order to avoid subjecting bank SBS
Entities to potentially differing requirements with respect to
electronic record preservation. As discussed above, 26 SBS Entities
have a prudential regulator (i.e., are bank SBS Entities). The
exclusion of bank SBS Entities from the scope of the proposed
electronic recordkeeping system requirements would reduce aggregate
benefits and costs related to modifying electronic recordkeeping
systems to conform to the proposed amendment to paragraph (e)(2) of
Rule 18a-6.
    \142\ See section V.D. of this release (discussing increases and
decreases in costs and burdens relating to proposals for purposes of
the Paperwork Reduction Act).
---------------------------------------------------------------------------

    These aggregate cost savings may be reduced by three factors.
First, some affected entities may have already streamlined their
regulatory electronic recordkeeping systems with systems used for
business records consistent with the Commission interpretations
described above. Second, some affected entities may elect to upgrade
existing business recordkeeping systems to accommodate the proposed
audit-trail alternative. The affected entities that choose to undertake
such upgrades may do so if aggregate savings from eliminating redundant
electronic recordkeeping systems outweigh the costs of buildout for
existing systems. The Commission expects that these costs would
primarily be realized by broker-dealers. However, potential buildout
costs may decrease the cost savings from the proposal. Third, because
the proposal would not require broker-dealers to make changes to
recordkeeping systems that are currently compliant with the WORM
requirement, they may choose not to make any changes to recordkeeping
systems. Such broker-dealers may, for example, choose to continue
maintaining separate recordkeeping systems for business purposes and
for regulatory purposes.
    The proposal may also benefit customers and counterparties of
broker-dealers and nonbank SBS Entities. Specifically, to the extent
that broker-

dealers and nonbank SBS Entities currently pass on part or all of their
recordkeeping costs to their customers and counterparties, some of the
above cost savings may flow through to customers and counterparties of
broker-dealers and nonbank SBS Entities in the form of lower costs or
greater availability of services. The extent to which cost savings are
passed along to customers and counterparties will depend on several
factors, including the price elasticity of the demand for broker-dealer
and nonbank SBS Entity services, the substitutability of broker-dealers
and nonbank SBS Entities, concentration in the broker-dealer and
nonbank SBS Entity industries due to economies of scale, heterogeneity
of broker-dealer and nonbank SBS Entity services, and market
segmentation, among others.
    The proposal may also enhance Commission oversight of nonbank SBS
Entities and broker-dealers. To the degree that the proposal may lead
broker-dealers and nonbank SBS Entities to move to a single
recordkeeping system for both business and regulatory purposes, and if
affected entities direct compliance cost savings to investments in
system improvements and maintenance, the reliability and efficiency of
recordkeeping systems may increase. Moreover, the Commission
preliminarily believes that the proposed audit-trail and WORM
alternatives will provide flexibility for broker-dealers and nonbank
SBS Entities, while still maintaining the essential ability of the
Commission to access the entities' records in the course of
examinations or other activities.
    The Commission preliminarily believes that some of the proposed
amendments may provide compliance efficiencies. For example, the
proposed amendments related to the verification of completeness and
accuracy of the processes for retaining records electronically may
introduce time efficiencies in achieving compliance when an original
record is added to the electronic recordkeeping system. Similarly,
proposed amendments to provide additional specificity to the
obligations relating to the auditable system of controls required by
paragraph (f)(3)(v) and Rule 17a-4 and Rule paragraph (e)(3)(v) of Rule
18a-6 may introduce time and compliance efficiencies by lowering
burdens on compliance professionals' time. Further, the Commission
preliminarily believes that the elimination of the notification and
representation requirements from Rule 17a-4(f) would alleviate some
burden currently imposed on broker-dealers, as discussed below.\143\
---------------------------------------------------------------------------

    \143\ See section V.D. of this release (discussing increases and
decreases in costs and burdens relating to proposals for purposes of
the Paperwork Reduction Act).
---------------------------------------------------------------------------

    In addition, the proposed elimination of the third-party access and
undertakings requirements may benefit affected entities by reducing
cybersecurity and trade-secret risks attendant to requiring a third
party to fulfill these responsibilities. Similarly, the proposed
elimination of the escrow account option may reduce cybersecurity risk
attendant to having this information held by a third party in
escrow.\144\
---------------------------------------------------------------------------

    \144\ The Commission does not expect significant benefits or
costs associated with certain other amendments contemplated in the
proposal that the Commission believes are technical in nature. These
amendments include simplification of the introductory text of
paragraph (f)(3) of Rule 17a-4 and paragraph (e)(3) of Rule 18a-6;
amendments to paragraphs (f)(3)(i) of Rule 17a-4 and (e)(3)(i) of
Rule 18a-6 to replace terms tied to micrographic media and optical
disk technology; amendments to better clarify paragraph (f)(3)(ii)
of Rule 17a-4 and paragraph (e)(3)(ii) of Rule 18a-6; and amendments
moving the requirements for broker-dealers using micrographic media
to new paragraph (f)(4) of Rule 17a-4.
---------------------------------------------------------------------------

    Certain of the proposed amendments may also incrementally improve
regulatory oversight. For example, proposed amendments related to the
ability to download and transfer records in human readable and
reasonably usable electronic formats may facilitate more efficient
Commission oversight as they would reduce the time costs of staff
review of individual records as well as searching and sorting
electronic records. Further, the proposed amendments requiring that a
senior officer provide required undertakings may provide the Commission
with a means to obtain records if an affected entity refuses to produce
them in the normal course, which may enhance the efficiency of
Commission examinations and oversight.

C. Costs of the Proposed Amendments

    The proposed amendments are intended to modernize the Commission's
recordkeeping requirements and to reduce recordkeeping duplication by
affected entities. However, as referenced above, the Commission
recognizes that some broker-dealers and nonbank SBS Entities may bear
costs from having to alter electronic recordkeeping systems currently
used. Nonbank SBS Entities may, for example, need to alter electronic
storage systems to comply with either the audit-trail or WORM
requirement. In addition, broker-dealers may need to build new or alter
existing electronic recordkeeping systems to the extent they would like
to meet the audit-trail requirement. As noted below,\145\ based upon
information provided to the Commission by the securities industry, the
Commission estimates that the initial cost to build and implement a
WORM-compliant electronic recordkeeping system for a large broker-
dealer is $10 million, with an additional cost of $1.2 million annually
to maintain the system,\146\ and the Commission believes that the SBS
Entities that would be affected by the proposed rule amendments are of
large sizes comparable to the universe of broker-dealers that the
rulemaking petitioners used to derive those estimates. In addition,
based on feedback from the securities industry, the Commission believes
that the initial cost to build and implement an electronic
recordkeeping system that meets the audit-trail requirements and the
ongoing cost to maintain the system would be substantially lower than
the analogous costs that would be incurred with respect to a WORM-
compliant system.\147\ In particular, the Commission estimates that the
initial cost to build and implement an electronic recordkeeping system
that meets the audit-trail requirement for a large broker-dealer or SBS
Entity without a prudential regulator and that is not a broker-dealer
is $1,000,000, with an additional cost of $120,000 annually to maintain
the system.
---------------------------------------------------------------------------

    \145\ See section V.D. of this release (discussing decreases and
increases in costs and burdens relating to proposals for purposes of
the Paperwork Reduction Act).
    \146\ See 17a-4(f) Rulemaking Petition Addendum at 4-5.
    \147\ See e.g. Rule 17a-4(f) Rulemaking Petition at 6-7.
---------------------------------------------------------------------------

    There are 802 broker-dealers with assets greater than $10 million
and four SBSDs that would be subject to paragraph (e)(2) of Rule 18a-6.
The Commission anticipates that eliminating the application of
paragraph (e)(2) of Rule 18a-6 to the 21 SBSDs that have a prudential
regulator and are subject to Rule 18a-6 would result in a decrease of
100 hours per firm on an annual basis, or 2,100 hours per year for all
firms affected by the proposed amendment, for an ongoing cost savings
of $663,000 per year for all affected firms.\148\
---------------------------------------------------------------------------

    \148\ 2,100 hours x $316 per hour (at the compliance manager
rate) = $663,000.
---------------------------------------------------------------------------

    The Commission does not believe any broker-dealers or SBSDs will
elect to build a WORM-compliant electronic recordkeeping system.
Moreover, the Commission estimates that most of these firms have
electronic recordkeeping

systems that could meet the audit-trail requirement or that could be
configured to meet that requirement without the need to build a new
system. The Commission estimates that 20 of these firms would elect to
build a new electronic recordkeeping system to meet the audit-trail
requirement for an initial one-time industry cost burden of $20,000,000
and an annual cost burden of $2,400,000.
    The Commission estimates that the cost for the 2,749 broker-dealers
with $10,000,000 or less in total assets to build and maintain an
electronic recordkeeping system that meets the proposed audit-trail
requirement would be significantly less than the $1,000,000 initial and
$120,000 annual costs estimated for the 802 larger broker-dealers and
four SBSDs that would be subject to paragraph (e)(2) of Rule 18a-6.
Consequently, the Commission estimates that the initial cost to build
and implement an electronic recordkeeping system that meets the audit-
trail requirement for these smaller broker-dealers is $100,000, with an
additional cost of $12,000 annually to maintain the system. The
Commission estimates that most of the 2,749 broker-dealers with
$10,000,000 or less in total assets will continue to preserve records
in the manner they do today: Using a WORM-compliant system, using
micrographic media, or maintaining paper records. The Commission
estimates that 80 of these firms would elect to build a new electronic
recordkeeping system to meet the audit-trail requirement for an initial
one-time industry cost burden of $8,000,000 and an annual cost burden
of $960,000.
    The Commission believes that broker-dealers and SBS Entities would
incur an initial burden and ongoing annual burden in establishing a
backup electronic recordkeeping system. The Commission believes these
burdens and costs would be substantially less than the burdens and
costs of the primary electronic recordkeeping systems because of the
benefit of economies of scale for the backup system whereby common
technology and personnel could be used for both systems. The Commission
estimates that the costs and burdens for the 802 larger broker-dealers
and four SBSDs that would be subject to paragraph (e)(2) of Rule 18a-6
would be $250,000 in initial burdens and costs and $30,000 in annual
burdens and costs. Further, the Commission expects that the broker-
dealers and SBS Entities that have electronic recordkeeping systems
that could meet the audit-trail requirement or that could be configured
to meet that requirement without the need to build a new system also
maintain backup recordkeeping systems for business continuity purposes.
Therefore, the initial and annual costs would be incurred by the 20
firms that elect to build a new electronic recordkeeping system that
meets the proposed audit-trail requirements. Consequently, the
Commission estimates that the industry-wide costs and burdens for these
firms would be $5,000,000 in initial costs and burdens and $600,000 in
annual costs and burdens.
    The Commission estimates that the costs and burdens incurred by the
80 smaller broker-dealers that would build electronic recordkeeping
systems to meet the audit-trail requirement and, therefore, need to
build a backup recordkeeping system, would be substantially less than
the costs and burdens incurred by the larger broker-dealers. The
Commission estimates that these firms would incur an initial costs and
burdens of $25,000 and ongoing annual costs and burdens of $3,000.
Therefore, the Commission estimates that the industry-wide costs and
burdens for these firms would be $2,000,000 in initial costs and
burdens and $240,000 in ongoing annual costs and burdens.
    The Commission recognizes that the proposal would not harmonize
with the parallel recordkeeping rule for CFTC registrants (e.g.,
futures commission merchants and swap dealers). In contrast, the
proposal would impose a bright line audit-trail or WORM requirement. To
the degree that such requirements may not satisfy CFTC requirements, a
lack of harmonization in the recordkeeping requirement for registrants
may give rise to compliance inefficiencies for broker dealers and SBS
Entities that are dually registered with the CFTC.
    Certain other aspects of the proposed amendments may also impose
costs on affected entities. Specifically, the proposed amendments
related to human readable and reasonably usable electronic file formats
may impose compliance costs related to the required updates to
recordkeeping systems.\149\ Proposed amendments to third-party access
and undertakings requirements may also impose additional time demands
on senior officers, though these costs may be at least partially offset
for broker-dealers by savings attendant to removing the requirement for
third-party access. To the extent that these proposed requirements
increase the scope of senior officer duties and increase potential
liability on the part of senior officers, senior officers may demand
higher compensation and liability insurance, which may result in an
increase to senior officer recruitment and retention costs. Further,
amendments requiring broker-dealers and SBS Entities to have a backup
set of records when records are preserved on an electronic
recordkeeping system may impose additional costs related to making
updates to compliance systems, as compared to the current rules'
requirements to store separately from originals a duplicate copy of a
record.\150\
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    \149\ See section V.D. of this release (discussing increases and
decreases in costs and burdens relating to proposals for purposes of
the Paperwork Reduction Act).
    \150\ The Commission does not expect significant costs
associated with certain other amendments contemplated in the
proposal, including amendments to eliminate the notification and
representation requirements from Rule 17a-4(f); amendments to
eliminate the escrow account option from paragraph (f)(3)(vi) of
Rule 17a-4 and paragraph (e)(3)(vi) of Rule 18a-6; and amendments to
the requirements of paragraph (f)(2)(ii)(B) of Rule 17a-4 and
paragraph (e)(2)(i) of Rule 18a-6 to provide additional specificity
regarding the requirement that original records are completely and
accurately captured.
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D. Reasonable Alternatives

    The Commission has considered a number of alternatives. For
example, the Commission has considered harmonizing the recordkeeping
rules for SBS Entities with the CFTC's principles-based approach
applicable to Swap Entities, but retaining the proposed audit-trail
requirement for broker-dealers. As another alternative, the Commission
considered harmonizing recordkeeping rules for both broker-dealers and
SBS Entities with the CFTC's principles-based approach. These
alternatives could enhance the cost savings from the proposal as
affected entities may not need to modify their business recordkeeping
systems to meet the proposed electronic recordkeeping system
requirements, particularly with respect to nonbank SBS Entities that
would need to use electronic recordkeeping systems that meet the WORM
or audit-trail requirement. In addition, these alternatives could
facilitate transactions across integrated swap and security-based swap
markets. The Commission believes that its proposed rule amendments
establishing electronic recordkeeping requirements for SBS Entities
should provide greater protection to the original records created and
preserved by SBS Entities, thereby giving regulators more reliable and
secure access to those records. Unlike the CFTC's 2017 amendment, the
Commission's proposal retains the WORM standard as a compliance option;
the standard requires electronic

records to be maintained exclusively in a non-rewriteable, non-erasable
format. The audit-trail alternative would require that the electronic
records be preserved in a manner that permits the recreation of an
original record if it is altered, over-written, or erased. Moreover,
the Commission believes that its proposal addresses the same concerns
addressed in the CFTC proposal, namely the security and authenticity of
and access to records.\151\ Finally, the Commission preliminarily
believes that the costs related to modification of existing business
recordkeeping systems to meet the proposed electronic recordkeeping
system requirements are likely to be low relative to the baseline
ongoing costs of maintaining duplicative recordkeeping systems. Thus,
the relative magnitude of this benefit of the alternative may be
limited.
---------------------------------------------------------------------------

    \151\ Compare Rule 17a-5(f)(3), as proposed to be amended and
Rule 18a-6(e)(3), as proposed to be amended, with CFTC Section
1.31(d)(2).
---------------------------------------------------------------------------

    As another alternative, the Commission could require prudentially
regulated SBS Entities to meet the proposed electronic recordkeeping
system requirements. This alternative would expand the scope of
application of the requirements, magnifying its benefits for Commission
oversight as well as costs of altering existing recordkeeping systems.
As a baseline matter, the Commission recognizes that prudentially
regulated SBS Entities are subject to a robust system of recordkeeping
requirements for different types of activities, including recordkeeping
requirements under the Bank Secrecy Act regarding funds transfers equal
to or greater than $3,000; \152\ recordkeeping requirements regarding
fiduciary accounts; \153\ recordkeeping requirements for securities
transactions; \154\ and recordkeeping requirements for small business
and farm loans, including a requirement to maintain the information in
machine readable form.\155\ Importantly, as discussed above, the
Commission preliminarily believes that the proposed rule's requirements
may conflict or overlap with the recordkeeping systems banks have
implemented under regulations or guidance of the prudential regulators.
The Commission preliminarily believes that requiring prudentially
regulated SBS Entities to meet the proposed electronic recordkeeping
system requirements (in addition to the recordkeeping requirements
these entities are already subject to) would not create significant
incremental benefits.
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    \152\ See, e.g., 31 CFR 1020.410.
    \153\ See 12 CFR 9.8.
    \154\ See 12 CFR 12.3.
    \155\ See 12 CFR 25.42.
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    As another alternative, the Commission could have proposed
eliminating the WORM alternative and requiring all broker-dealers and
nonbank SBS Entities to comply with an audit-trail requirement. This
alternative would require all affected entities to modernize their
recordkeeping systems to meet the audit-trail requirement. While this
alternative could produce long-term compliance efficiencies for a
greater number of affected participants, it would also require all
affected entities with WORM compliant systems to upgrade their
electronic recordkeeping systems. Since compliance costs may be
particularly burdensome for smaller entities, the alternative could
have a disproportionate effect on smaller and medium-sized broker-
dealers.
    Finally, the Commission could have proposed requiring that a second
senior officer has independent access to and the ability to provide the
records and to execute the undertakings at all times. To the degree
that relying on a single senior officer may present risks that the
senior officer is unable or unwilling to obtain records, this
alternative could increase the probability that the Commission would be
able to access records. Thus, relative to the proposal, the alternative
may further enhance the efficiency of Commission examinations and
oversight. However, this alternative may impose additional time demands
on a second senior officer in each affected entity. To the extent that
the alternative would increase the scope of duties and increase
potential liability on the part of a greater number of senior officers
of affected entities, more senior officers may demand higher
compensation and liability insurance, which may result in a greater
increase to senior officer recruitment and retention costs relative to
the proposal. Requiring a second individual to have the authority to
grant access to the records may potentially increase cybersecurity
risks compared to the proposed approach, although it would likely still
represent less risk than the baseline third-party approach.

E. Effects on Efficiency, Competition, and Capital Formation

    The primary effect of the proposed amendments on efficiency would
stem from increased efficiency of broker-dealer and SBS Entity
recordkeeping. Permitting either the audit-trail or WORM (introduced in
the optical disk era) alternative is intended to allow broker-dealers
and SBS Entities to modernize the records and systems such entities
maintain for regulatory purposes. The Commission anticipates that most
of the affected entities would respond to such a requirement by
eliminating duplicative recordkeeping for regulatory and business
purposes, giving rise to cost efficiencies discussed above. The
proposal would not alter the amount, type, or manner of disclosures
available to investors or the Commission, nor would it change broker-
dealer or SBS Entity business models or activities. Thus, the
Commission does not anticipate the proposal to impact informational or
allocative efficiency.
    The proposed amendments are not expected to significantly impact
competition between bank and nonbank SBS Entities. As described above,
the proposal would impose electronic recordkeeping system requirements
(including the audit-trail alternative) on nonbank SBS Entities, but
not on bank SBS Entities. Transitioning regulatory recordkeeping
systems from hardware solutions (such as optical disks) meeting the
WORM requirement to electronic records compliant with the audit-trail
requirement may require costly modifications to existing recordkeeping
systems of broker-dealers and nonbank SBS Entities may need to modify
existing electronic recordkeeping systems to meet either the WORM or
audit-trail requirement; bank SBS Entities would not bear such costs.
    To the extent that the proposal results in cost savings for broker-
dealers and SBS Entities estimated above, affected entities may be able
to allocate newly available capital into capital forming activities.
However, it is not clear that affected entities would direct cost
savings to expanding their financial intermediation business and given
the magnitude of the cost savings estimated above, the capital
formation effects of the proposal are likely limited. Therefore, the
proposal is also not expected to have significant effects on capital
formation.

F. Request for Comment

    The Commission requests comment on all aspects of the economic
analysis of the proposed amendments. To the extent possible, the
Commission requests that commenters provide supporting data and
analysis with respect to the benefits, costs, and effects on
competition, efficiency, and capital formation of adopting the proposed
amendments or any reasonable alternatives. In particular, the
Commission asks commenters to consider the following questions:
    1. What additional qualitative or quantitative information should
the Commission consider as part of the

baseline for its economic analysis of these amendments? How many
broker-dealers are maintaining separate recordkeeping systems for
business and regulatory purposes? How many broker-dealers and SBS
Entities affected by the proposed amendments have electronic
recordkeeping systems that would meet the proposed audit-trail
requirement?
    2. Has the Commission accurately characterized the costs and
benefits of proposed amendments? If not, why not? Should any of the
costs or benefits be modified? What, if any, other costs or benefits
should the Commission take into account? If possible, please offer ways
of estimating these costs and benefits. What additional considerations
can the Commission use to estimate the costs and benefits of the
proposed amendments?
    3. Has the Commission accurately characterized the effects on
competition, efficiency, and capital formation arising from the
proposed amendments? If not, why not?
    4. Has the Commission accurately characterized the economic effects
of the above alternatives? For example, has the Commission accurately
characterized the economic effects of the alternative requiring
prudentially regulated SBS Entities to meet the proposed electronic
recordkeeping system requirements? If not, why not? Should any of the
costs or benefits be modified? What, if any, other costs or benefits
should the Commission take into account?
    5. Are there other reasonable alternatives to the proposed
amendments? What are the economic effects of any other alternatives?
    6. Are there data sources or data sets that can help the Commission
refine its estimates of the costs and benefits associated with the
proposed amendments? If so, please identify them.

V. Paperwork Reduction Act

    Certain provisions of the rule amendments proposed in this release
would contain a new ``collection of information'' within the meaning of
the Paperwork Reduction Act of 1995 (``PRA'').\156\ The Commission is
submitting the proposed rule amendments and proposed new rules to the
Office of Management and Budget (``OMB'') for review and approval in
accordance with the PRA and its implementing regulations.\157\ An
agency may not conduct or sponsor, and a person is not required to
respond to a collection of information unless it displays a currently
valid OMB control number.\158\ The titles for the collections of
information are:
---------------------------------------------------------------------------

    \156\ See 44 U.S.C. 3501 et seq.
    \157\ See 44 U.S.C. 3507; 5 CFR 1320.11.
    \158\ See 5 CFR 1320.11(l).
---------------------------------------------------------------------------

    (1) Rule 17a-4--Records to be preserved by certain brokers and
dealers (OMB control number 3235-0279); and
    (2) Rule 18a-6--Records to be preserved by certain security-based
swap dealers and major security-based swap participants (OMB control
number 3235-0751).
    The burden estimates contained in this section do not include any
other possible costs or economic effects beyond the burdens required to
be calculated for PRA purposes.

A. Summary of Collections of Information

1. Proposed Amendments to Rules 17a-4(f) and 18a-6(e)
    Rule 17a-4 sets forth record preservation requirements applicable
to broker-dealers, including broker-dealers also registered as SBSDs or
MSBSPs.\159\ Rule 18a-6 sets forth record preservation requirements
applicable to SBS Entities that are not dually registered as broker-
dealers.\160\ The Commission is proposing to amend Rules 17a-4(f) \161\
and 18a-6(e),\162\ which prescribe requirements for broker-dealers and
SBS Entities, respectively, that elect to preserve records
electronically to comply with the record preservation requirements of
Rules 17a-4 and 18a-6, respectively.
---------------------------------------------------------------------------

    \159\ See 17 CFR 240.17a-4. As stated above, the term ``broker-
dealer'' for the purposes of this release includes broker-dealers
that are also registered as SBSDs or MSBSPs.
    \160\ See 17 CFR 240.18a-6. As stated above, the term ``SBS
Entity'' for the purposes of this release refers to SBSDs and MSBSPs
that are not also registered as broker-dealers.
    \161\ See Rule 17a-4(f) (setting forth the electronic record
preservation requirements for broker-dealers).
    \162\ See Rule 18a-6(e) (setting forth the electronic record
preservation requirements for SBS Entities).
---------------------------------------------------------------------------

    The proposed amendments to Rule 17a-4(f) would add the audit-trail
alternative to the current WORM requirement.\163\ The amendments to
Rule 18a-6(e) would add a requirement that electronic recordkeeping
systems used by nonbank SBS Entities to comply with the record
preservation requirements of Rule 18a-6 must meet either the audit-
trail or WORM requirement.\164\
---------------------------------------------------------------------------

    \163\ See section II.D. of this release (discussing these
proposed amendments).
    \164\ As defined above, the term ``nonbank SBS Entity'' refers
to an SBS Entity that does not have a prudential regulator and the
term ``bank SBS Entity'' refers to an SBS Entity that has a
prudential regulator.
---------------------------------------------------------------------------

    Rule 17a-4(f) currently requires a broker-dealer to store
separately from the original, on any medium acceptable under Rule 17a-
4, a duplicate copy of a record for the requisite time period.
Similarly, Rule 18a-6(e) currently requires that an SBS Entity store
separately from the original a duplicate copy of a record stored on the
electronic storage system for the requisite time period. These current
provisions require broker-dealers and SBS Entities to maintain a second
copy of a record. The Commission is proposing amendments to both of
these paragraphs to require the broker-dealer and the SBS Entity to
have a backup set of records when records are preserved on an
electronic recordkeeping system.\165\ Under the proposal, the broker-
dealer or SBS Entity would need to have a second electronic
recordkeeping system.
---------------------------------------------------------------------------

    \165\ See section II.E. of this release (discussing these
proposed amendments).
---------------------------------------------------------------------------

    Rule 17a-4(f) currently requires that, for every broker-dealer
exclusively using electronic storage media for some or all of its
record preservation, at least one third party, who has access to and
the ability to download information from the broker-dealer's electronic
storage media to any acceptable medium under Rule 17a-4, must file with
the DEA for the broker-dealer certain undertakings that the third party
will provide access to the broker-dealer's electronic records and
provide them to the Commission and other securities regulators if
requested. The proposed amendments to Rule 17a-4(f) would eliminate the
third-party access and undertakings requirements and replace them with
a requirement that a senior officer of the broker-dealer have the
access and provide the necessary undertakings.\166\ Rule 18a-6(e)
currently does not have third-party access and undertakings
requirements; the proposed amendments to the rule would add senior
officer access and undertakings requirements analogous to that of Rule
17a-4(f), as proposed to be amended.\167\
---------------------------------------------------------------------------

    \166\ Id.
    \167\ Id.
---------------------------------------------------------------------------

    The Commission is proposing to no longer impose the requirements
for electronic recordkeeping systems in paragraph (e)(2) of Rule 18a-6,
as proposed to be amended, on bank SBS Entities.\168\ However, the
other provisions of paragraph (e) of Rule 18a-6, as proposed to be
amended, would continue to apply to all SBS Entities.
---------------------------------------------------------------------------

    \168\ See section II.D. of this release (discussing these
proposed amendments).
---------------------------------------------------------------------------

    The Commission is proposing to move the requirements for broker-
dealers using micrographic media to new

paragraph (f)(4) of Rule 17a-4.\169\ Rule 18a-6(e) does not provide for
retaining records using micrographic media.
---------------------------------------------------------------------------

    \169\ See section II.F. of this release (discussing these
proposed amendments).
---------------------------------------------------------------------------

    The proposed amendments to Rule 17a-4(f) would eliminate a
requirement that the broker-dealer notify its DEA before employing an
electronic recordkeeping system.\170\ Rule 18a-6(e) currently does not
have a similar DEA notification requirement.
---------------------------------------------------------------------------

    \170\ See section II.C. of this release (discussing these
proposed amendments).
---------------------------------------------------------------------------

2. Proposed Amendments to Rules 17a-4(j) and 18a-6(g)
    Rule 17a-4(j) requires broker-dealers to furnish promptly to the
Commission legible, true, complete, and current copies of those records
of the firm that are required to be preserved under Rule 17a-4 or any
other record of the firm that is subject to examination under Section
17(b) of the Exchange Act.\171\ Rule 18a-6(g) requires SBS Entities to
furnish promptly to a representative of the Commission legible, true,
complete, and current copies of those records of the firm that are
required to be preserved under Rule 18a-6, or any other records of the
firm subject to examination or required to be made or maintained
pursuant to Section 15F of the Exchange Act.\172\
---------------------------------------------------------------------------

    \171\ See Rule 17a-4(j) (setting forth the prompt production of
records requirements for broker-dealers); 15 U.S.C. 78q(b).
    \172\ See Rule 18a-6(g) (setting forth the prompt production of
records requirements for SBS Entities); 15 U.S.C. 78o-10(f).
---------------------------------------------------------------------------

    The Commission is proposing to amend the prompt production of
records requirements of Rules 17a-4(j) and 18a-6(g).\173\ The proposed
amendments to Rules 17a-4(j) and 18a-6(g) would require a broker-dealer
or SBS Entity, respectively, to furnish a record and its audit trail
(if applicable) preserved on an electronic recordkeeping system
pursuant to Rules 17a-4(f) and 18a-6(e), respectively, in a reasonably
usable electronic format, if requested by a representative of the
Commission.\174\
---------------------------------------------------------------------------

    \173\ See section II.G. of this release (discussing these
proposed amendments).
    \174\ See Rule 17a-4(j) and Rule 18a-6(g), as proposed to be
amended.
---------------------------------------------------------------------------

B. Proposed Use of Information

    The requirements of Rules 17a-4 and 18a-6, and the proposed
amendments to these rules, are designed, among other things, to promote
the prudent operation of broker-dealers and SBS Entities and to assist
the Commission, SROs, and state securities regulators in conducting
effective examinations.\175\ The proposed amendments to Rules 17a-4(j)
and 18a-(g) are designed to facilitate examinations and other
regulatory reviews by making them more efficient. Taken as a whole, the
collections of information under the proposed amendments to Rules 17a-
4(f), 18a-6(e), 17a-4(j), and 18a-6(g) would promote the prudent
operation of broker-dealers and SBS Entities and facilitate the
examinations of broker-dealers and SBS Entities by the Commission,
SROs, and state securities regulators.
---------------------------------------------------------------------------

    \175\ See, e.g., Books and Records Requirements for Brokers and
Dealers Under the Securities Exchange Act of 1934, Exchange Act
Release No. 44992 (Oct. 26, 2001), 66 FR 55818 (Nov. 2, 2001) (``The
Commission has required that broker-dealers create and maintain
certain records so that, among other things, the Commission, [SROs],
and State Securities Regulators . . . may conduct effective
examinations of broker-dealers'' (footnote omitted)).
---------------------------------------------------------------------------

C. Respondents

    As of December 31, 2020, there were 3,551 broker-dealers registered
with the Commission.\176\ As of November 9, 2021, 41 SBSDs have
registered with the Commission, while no MSBSPs have registered with
the Commission.\177\ Six of the SBSDs are existing broker-dealers or
will be broker-dealers and, therefore, are included in the 3,551
broker-dealers. Nine of the SBSDs are applying substituted compliance
with respect to the requirements of Rule 18a-6(e).\178\ One SBSD is
using the alternative compliance mechanism of Exchange Act Rule 18a-10
and, therefore, is complying with the CFTC's recordkeeping rules.\179\
This leaves 25 SBSDs that are subject to Rule 18a-6(e) and, therefore,
would be subject to the proposed amendments to that rule. Twenty-one of
these SBSDs have a prudential regulator. This leaves four SBSDs that
would be subject to paragraph (e)(2) of Rule 18a-6. Finally, 24 of the
25 SBSDs subject to Rule 18a-6(e) are also registered with the CFTC as
swap dealers.
---------------------------------------------------------------------------

    \176\ This estimate is derived from broker-dealer FOCUS filings
as of December 31, 2020, as described in greater detail in the
economic baseline, and is inclusive of five OTC derivatives dealers
affected by the proposed amendments.
    \177\ See List of Registered Security-Based Swap Dealers and
Major Security-Based Swap Participants, available at: https://www.sec.gov/tm/List-of-SBS-Dealers-and-Major-SBS-Participants.
    \178\ See Substituted Compliance Notices, available at: https://www.sec.gov/tm/Substituted-compliance-Notices.
    \179\ See 17 CFR 240.18a-10.
---------------------------------------------------------------------------

    The following table summarizes the estimated number of respondents
that would be subject to the amendments to Rule 17a-4(f) and the number
of SBSDs that would be subject to the amendments to Rule 18a-6(e) and
paragraph (e)(2) of Rule 18a-6.

------------------------------------------------------------------------
                   Type of registrant                         Number
------------------------------------------------------------------------
Broker-dealers (including SBSDs dually registered as               3,551
 broker-dealers)........................................
SBSDs that would be subject to Rule 18a-6(e) as proposed              25
 to be amended..........................................
SBSDs that would be subject to Rule 18a-6(e)(2) as                     4
 proposed to be amended.................................
------------------------------------------------------------------------

    Based upon the recent experience of the staff, the Commission
estimates that approximately 95% of the broker-dealers, including
broker-dealers that will be dually registered as SBS Entities, (i.e.,
3,373 broker-dealers) use electronic recordkeeping systems; all of
these firms are expected to continue to use electronic recordkeeping
systems pursuant to the requirements of Rule 17a-4(f), as proposed to
be amended. The Commission believes that all SBSDs that are subject to
Rule 18a-6(e) (25 SBSDs) use electronic recordkeeping systems pursuant
to the requirements of Rule 18a-6(e) and would continue to do so under
the proposed amendments.

D. Total Initial and Annual Reporting Burdens

1. Proposed Amendments to Rules 17a-4(f) and 18a-6(e)
    Rules 17a-4(f) and 18a-6(e) currently impose collection of
information requirements that result in initial and annual time burdens
for broker-dealers and SBSDs. The proposed amendments to these rules
would both add to and decrease the current time burden estimates as
explained below.
    The proposed amendments to Rule 17a-4(f) would provide an audit-
trail alternative to the current WORM requirement for electronic
recordkeeping systems used by broker-dealers to meet the record
preservation requirements of Rule 17a-4.\180\ Consequently, broker-
dealers could continue to meet the requirements of the rule by using a
WORM-compliant electronic recordkeeping system they employ today. The
amendments to Rule 18a-6(e) would add a requirement that electronic
recordkeeping systems used by nonbank SBSDs to comply with the record
preservation requirements of Rule 18a-6 must meet either the audit-
trail or WORM requirement.\181\
---------------------------------------------------------------------------

    \180\ See section II.D. of this release (discussing these
proposed amendments).
    \181\ Id.
---------------------------------------------------------------------------

    The Commission believes that few, if any, broker-dealers or nonbank
SBSDs that use electronic recordkeeping systems are not currently
compliant with the rules, as proposed to be amended, either because
they currently

use an electronic recordkeeping system that meets the WORM requirement
or that could meet the proposed audit-trail requirement. Indeed, the
Commission believes that some broker-dealers and nonbank SBSDs are
using a modern, audit-trail compliant electronic recordkeeping system
for their own business purposes while simultaneously maintaining a
WORM-compliant system solely for the purpose of complying with the
requirements of Rule 17a-4(f).
    A broker-dealer that does not preserve records electronically would
incur initial costs to build an electronic recordkeeping system that
meets either the WORM requirement or the audit-trail requirement or
would have the initial burden of hiring a vendor to provide the
service. A broker-dealer that preserves records electronically using a
WORM-compliant electronic recordkeeping system would have an initial
burden to build an electronic recordkeeping system that meets the
audit-trail requirement, if it elects to use that alternative. An SBSD
would have an initial burden build an electronic recordkeeping system
that meets either the WORM requirement or the audit-trail requirement
or would have the initial burden of hiring a vendor to provide the
service. Similarly, on an ongoing basis, the broker-dealer or SBSD
would be required to expend financial or human resources to maintain
their recordkeeping systems to comply with the proposed audit-trail or
WORM requirements.
    Based upon information provided to the Commission by the securities
industry, the Commission estimates that the initial cost to build and
implement a WORM-compliant electronic recordkeeping system for a large
broker-dealer is $10 million, with an additional cost of $1.2 million
annually to maintain the system.\182\ Based on feedback from the
securities industry, the Commission believes that the initial cost to
build and implement an electronic recordkeeping system that meets the
audit-trail requirements and the ongoing cost to maintain the system
would be substantially lower than the analogous costs that would be
incurred with respect to a WORM-compliant system.\183\ Consequently,
the Commission estimates that the initial cost to build and implement
an electronic recordkeeping system that meets the audit-trail
requirement for a large broker-dealer is $1,000,000, with an additional
cost of $120,000 annually to maintain the system. There are 802 broker-
dealers with assets greater than $10 million and there are four SBSDs
that would be subject to paragraph (e)(2) of Rule 18a-6. The Commission
does not believe any of these firms will elect to build a WORM-
compliant electronic recordkeeping system. Moreover, the Commission
estimates that most of these firms have electronic recordkeeping
systems that could meet the audit-trail requirement or that could be
configured to meet that requirement without the need to build a new
system. The Commission estimates that 20 of these firms would elect to
build a new electronic recordkeeping system to meet the audit-trail
requirement for an initial one-time industry cost burden of $20,000,000
and an annual cost burden of $2,400,000.
---------------------------------------------------------------------------

    \182\ See Rule 17a-4(f) Rulemaking Petition Addendum at 4-5.
    \183\ See e.g. Rule 17a-4(f) Rulemaking Petition at 6-7.
---------------------------------------------------------------------------

    The Commission estimates that the cost for the 2,749 broker-dealers
with $10,000,000 or less in total assets to build and maintain an
electronic recordkeeping system that meets the proposed audit-trail
requirement would be significantly less than the $1,000,000 initial and
$120,000 annual costs estimated for the 802 larger broker-dealers and
the four SBSDs that would be subject to paragraph (e)(2) of Rule 18a-6.
Consequently, the Commission estimates that the initial cost to build
and implement an electronic recordkeeping system that meets the audit-
trail requirement for these smaller broker-dealers is $100,000, with an
additional cost of $12,000 annually to maintain the system. The
Commission estimates that most of the 2,749 broker-dealers with
$10,000,000 or less in total assets will continue to preserve records
in the manner they do today: Using a WORM-compliant system, using
micrographic media, or maintaining paper records. The Commission
estimates that 80 of these firms would elect to build a new electronic
recordkeeping system to meet the audit-trail requirement for an initial
one-time industry cost burden of $8,000,000 and an annual cost burden
of $960,000.
    The Commission believes that broker-dealers and SBSDs would incur
an initial burden and ongoing annual burden in establishing a backup
electronic recordkeeping system. The Commission believes these burdens
and costs would be substantially less than the burdens and costs of the
primary electronic recordkeeping systems because of the benefit of
economies of scale for the backup system whereby common technology and
personnel could be used for both systems. The Commission estimates that
the costs and burdens for the 802 larger broker-dealers and the four
SBSDs that would be subject to paragraph (e)(2) of Rule 18a-6 would be
$250,000 in initial burdens and costs and $30,000 in annual burdens and
costs. Further, the Commission expects that the broker-dealers and
SBSDs that have electronic recordkeeping systems that could meet the
audit-trail requirement or that could be configured to meet that
requirement without the need to build a new system also maintain backup
recordkeeping systems for business continuity purposes. Therefore, the
initial and annual costs would be incurred by the 20 firms that elect
to build a new electronic recordkeeping system that meets that proposed
audit-trail requirement. Consequently, the Commission estimates that
the industry-wide costs and burdens for these firms would be $5,000,000
in initial costs and burdens and $600,000 in annual costs and burdens.
    The Commission estimates that the costs and burdens incurred by the
80 smaller broker-dealers that would build electronic recordkeeping
systems to meet the audit-trail requirement and, therefore, need to
build a backup recordkeeping system, would be substantially less than
the costs and burdens incurred by the larger broker-dealers. The
Commission estimates that these firms would incur an initial costs and
burdens of $25,000 and ongoing annual costs and burdens of $3,000.
Therefore, the Commission estimates that the industry-wide costs and
burdens for these firms would be $2,000,000 in initial costs and
burdens and $240,000 in ongoing annual costs and burdens.
    The proposed amendments to Rule 17a-4(f) would eliminate the third-
party access and undertakings requirements and replace them with a
requirement that a senior officer of the broker-dealer have the access
and provide the necessary undertakings. Based on the Commission's most
recent information submitted to the OMB in connection with the renewal
of Rule 17a-4, this would result in an estimated elimination of an
annual cost of less than $5,000 that the broker-dealer must incur in
paying a third party to agree to perform this service. Rule 18a-6(e)
does not contain a third-party undertakings requirement; however, the
proposed amendments to the rule would add senior officer access and
undertakings requirements analogous to that of Rule 17a-4(f), as
proposed to be amended.\184\

The Commission believes that the change, in the case of broker-dealers,
from a third party to a senior officer requirement and, in the case of
SBSDs, the addition of a senior officer requirement, would result in a
one-time initial burden of one hour per firm, for a total of 3,373
hours for an initial cost of $1,676,381 under Rule 17a-4(f) and 25
hours for an initial cost of $12,425 for SBSDs under Rule 18a-
6(e).\185\ The Commission also believes that the senior officer
requirement would add an annual burden of one hour per firm, for a
total of 3,373 hours for broker-dealers collectively \186\ for a total
ongoing cost of $1,676,381, and 25 hours for a total ongoing cost of
$12,425 for SBSDs collectively.\187\
---------------------------------------------------------------------------

    \184\ As noted above, paragraph (f) of Rule 18a-6 currently
includes a requirement that if the records required to be maintained
and preserved by the SBS Entity (whether electronic or otherwise)
are prepared or maintained by a third party on behalf of the SBS
Entity, the third party must file undertakings with the Commission.
See paragraph (f) of Rule 18a-6.
    \185\ Throughout this section, to monetize the internal costs
the Commission staff used data from the SIFMA publications,
Management and Professional Earnings in the Securities Industry--
2013, and Office Salaries in the Securities Industry--2013, modified
by the Commission staff to account for an 1800 hour work-year and
multiplied by 5.35 (professionals) or 2.93 (office) to account for
bonuses, firm size, employee benefits and overhead. These figures
have been adjusted for inflation through the end of 2020 using data
published by the Bureau of Labor Statistics.
     One-time initial cost for broker-dealers: 3,373 hours x $497
per hour (at the controller hourly rate) = $1,676,381. One time
initial cost for SBSDs: 25 hours x $497 per hour (at the controller
hourly rate) = $12,425.
    \186\ The Commission believes that while the existing third-
party requirement is an external burden, the proposed senior officer
requirement would be an internal burden required to be accounted for
in this section.
    \187\ Ongoing cost for broker-dealers: 3,373 hours x $497 per
hour (at the controller hourly rate) = $1,676,381. Ongoing cost for
SBSDs: 25 hours x $497 per hour (at the controller hourly rate) =
$12,425.
---------------------------------------------------------------------------

    The proposed amendments would move existing requirements for
broker-dealers using micrographic media from paragraph (f)(3)(i) of
Rule 17a-4 to proposed new paragraph (f)(4) of Rule 17a-4, but do not
change the substantive requirements. The proposed amendments do not
propose a micrographic media alternative for SBS Entities for the
reasons described above. The Commission does not believe the proposed
amendments relating to micrographic media would have any impact on the
burden experienced by broker-dealers.
    The Commission anticipates that eliminating the application of
paragraph (e)(2) of Rule 18a-6 to the 21 SBSDs that have a prudential
regulator and are subject to Rule 18a-6 would result in a decrease of
100 hours per firm on an annual basis, or 2,100 hours per year for all
firms affected by the proposed amendment, for an ongoing cost savings
of $663,000 per year for all affected firms.\188\
---------------------------------------------------------------------------

    \188\ 2,100 hours x $316 per hour (at the compliance manager
rate) = $663,000.
---------------------------------------------------------------------------

    Finally, based upon information provided to the Commission from
FINRA staff, the Commission believes that the elimination of the DEA
notification requirement would decrease the industry-wide burden of
compliance by one hour per broker-dealer submitting the notice to its
DEA, or approximately 433 hours per year, for an ongoing cost savings
of $136,828 \189\ per year for the industry.
---------------------------------------------------------------------------

    \189\ 433 hours x $316 per hour (at the compliance manager rate)
= $136,828.
---------------------------------------------------------------------------

2. Proposed Amendments to Rules 17a-4(j) and 18a-6(g)
    The proposed amendments to Rules 17a-4(j) and 18a-6(g) would
require a broker-dealer or SBS Entity, respectively, to furnish a
record and its audit trail (if applicable) preserved on an electronic
recordkeeping system pursuant to Rules 17a-4(f) and 18a-6(g),
respectively, in a reasonably usable electronic format, if requested by
a representative of the Commission. The Commission does not believe
that these proposed amendments will change the initial or annual hourly
burden for broker-dealers or SBS Entities. The Commission solicits
comment on what the estimated initial and annual burden is for broker-
dealers and SBS Entities to comply with current versions Rule 17a-4(j)
and Rule 18a-6(g) and for those firms to comply with those rules, as
proposed to be amended.

E. Collection of Information Is Mandatory

    The collections of information pursuant to the proposed amendments
are mandatory, as applicable, for broker-dealers and SBS Entities.

F. Confidentiality of Responses to Collection of Information

    A broker-dealer or SBS Entity requested by the Commission to
produce records retained electronically pursuant to the requirements of
Rules 17a-4 or 18a-6 can request confidential treatment of the
information.\190\ If such confidential treatment request is made, the
Commission anticipates that it will keep the information confidential
subject to applicable law.\191\
---------------------------------------------------------------------------

    \190\ See 17 CFR 200.83. Information regarding requests for
confidential treatment of information submitted to the Commission is
available on the Commission's website at http://www.sec.gov/foia/howfo2.htm#privacy.
    \191\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing
the public availability of information obtained by the Commission).
---------------------------------------------------------------------------

G. Retention Period for Recordkeeping Requirements

    Rule 17a-4, as proposed to be amended, specifies the required
retention periods for records required to be made and preserved by a
broker-dealer, whether electronically or otherwise.\192\ Rule 18a-6, as
proposed to be amended, specifies the required retention periods for
records required to be made and preserved by an SBS Entity, whether
electronically or otherwise.\193\ Many of the required records must be
retained for three years; certain other records must be retained for
longer periods.\194\
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    \192\ See Rule 17a-4, as proposed to be amended.
    \193\ See Rule 18a-6, as proposed to be amended.
    \194\ See Rules 17a-4 and 18a-6, as proposed to be amended.
---------------------------------------------------------------------------

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comment on the proposed collections of information in order to:
     Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information would have practical
utility;
     Evaluate the accuracy of the Commission's estimates of the
burden of the proposed collections of information;
     Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
     Evaluate whether there are ways to minimize the burden of
the collection of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology.
    Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Vanessa A. Countryman,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File Number S7-19-21.
Requests for materials submitted to OMB by the Commission with regard
to this collection of information should be in writing, with reference
to File Number S7-19-21 and be submitted to the Securities and Exchange
Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC
20549-2736. As OMB is required to make a decision

concerning the collections of information between 30 and 60 days after
publication, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication.

VI. Initial Regulatory Flexibility Act Analysis

A. Reasons for, and Objectives of, the Proposed Action

    The proposed amendments to Rules 17a-4 and 18a-6 are designed to
modernize the electronic recordkeeping requirements for broker-dealers
and SBS Entities, and to align the requirements in those rules more
closely to the current electronic recordkeeping practices of broker-
dealers and SBS Entities. As discussed in greater detail above, the
amendments to Rule 17a-4 would provide an audit-trail alternative to
the current requirement that broker-dealer electronic records be
preserved exclusively in a non-rewriteable, non-erasable format. The
audit-trail alternative would require that the electronic records be
preserved in a manner that permits the recreation of an original record
if it is altered, over-written, or erased. Rule 18a-6, which applies to
SBS Entities, currently does not have a requirement to preserve
electronic records: (1) In a manner that permits the recreation of an
original record if it is altered, over-written or erased; or (2)
exclusively in a non-rewriteable, non-erasable format. The amendments
to Rule 18a-6 would require an SBS Entity without a prudential
regulator that preserves records electronically to meet one of these
two requirements. The Commission believes that the amendments will save
many broker-dealers and SBS Entities from the burden of maintaining two
sets of parallel records: one for business purposes, preserved in a
manner that would fulfill the audit-trail alternative requirements that
the Commission is proposing, and another set of records that is
preserved in a non-rewritable, non-erasable method in order to comply
with the current requirements of 17a-4(f).
    The proposed amendments also would eliminate the third-party access
and undertakings requirements and replace them with a requirement that
a senior officer of the broker-dealer provide the access and
undertakings. The Commission preliminarily believes that the existing
third-party access and undertakings requirements are outdated in light
of the changed technological environment and that providing a third
party access to electronic recordkeeping systems and customer
information needlessly exposes firms to data leakage and cybersecurity
threats. The Commission preliminarily believes replacing the third-
party access and undertakings requirements with a requirement that a
senior officer provide access and the undertakings would address
cybersecurity and trade-secret concerns about requiring a third party
to fulfill this responsibility.
    In addition, the amendments would add a requirement to Rule 17a-
4(j) and 18a-6(g) that a broker-dealer or SBS Entity, respectively,
furnish a record and its audit trail (if applicable) preserved on an
electronic recordkeeping system pursuant Rules 17a-4(f) and 18a-6(g),
respectively, in a reasonably usable electronic format, if requested by
a representative of the Commission. The Commission believes that the
production of records in a reasonably usable electronic format would
facilitate examinations and other regulatory reviews by making them
more efficient.
    The amendments to Rule 17a-4 also would eliminate a requirement
that the broker-dealer notify its DEA before employing an electronic
recordkeeping system. The Commission preliminarily believes this
requirement is no longer necessary because the rule was adopted at a
time when the use of electronic recordkeeping systems by broker-dealers
to meet the record preservation requirements of Rule 17a-4 was a
relatively new phenomenon, and the staff of DEAs, including FINRA, now
have substantial experience and familiarity with the topic.
    Finally, the amendments to both rules would remove or replace text
to make them more technology neutral and to improve readability.

B. Legal Basis

    Pursuant to Exchange Act Section 17, 15 U.S.C. 78q the Commission
is proposing to revise Sec.  240.17a-4(f) and (j) and Sec.  240.18a-
6(e) and (g) of title 17 of the Code of Federal Regulations.

C. Small Entities Subject to the Proposed Rules

    As discussed above, the Commission estimates that approximately
3,551 broker-dealers and 25 SBSDs that are not broker-dealers would be
subject to the new electronic recordkeeping requirements as a result of
the amendments to Rules 17a-4(f) and (j) and to Rules 18a-6(e) and (g),
respectively. For purposes of this Regulatory Flexibility Act (``RFA'')
analysis, the Commission refers to broker-dealers that might be deemed
small entities under the RFA as ``small entities.''
    Based on FOCUS Report data, the Commission estimates that as of
June 30, 2021, approximately 1,439 of those broker-dealers might be
deemed small entities for purposes of this analysis. Based upon the
Commission's prior RFA certification that adoption of Rule 18a-6 would
not have a significant economic impact on a substantial number of small
entities for the purposes of the RFA,\195\ the Commission believes that
no small entities will be affected by the proposed amendments to Rule
18a-6.
---------------------------------------------------------------------------

    \195\ See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at
68645.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The RFA requires a description of the projected reporting,
recordkeeping, and other compliance requirements of the proposed
amendments to Rules 17a-4(f) and (j) and Rules 18a-6(e) and (g),
including an estimate of the classes of small entities that would be
subject to the requirements and the type of professional skill
necessary to prepare required reports and records. Following is a
discussion of the associated costs and burdens of compliance with the
proposed amendments, as incurred by small entities.\196\
---------------------------------------------------------------------------

    \196\ See section V.D.1, above (describing costs for smaller
broker-dealers, which could include broker-dealers that are small
entities).
---------------------------------------------------------------------------

    The Commission does not believe that the compliance costs of the
proposed amendments would be significant. The Commission believes that
the proposed audit-trail alternative to preserving electronic records
would be consistent with existing broker-dealer practices. Broker-
dealers have explained to the Commission that the electronic
recordkeeping systems used for business purposes are dynamic and
updated constantly (e.g., with each new transaction or position) and
easily accessible for retrieving records. The Commission believes that
these contemporary electronic recordkeeping business systems, in many
cases, can be configured to meet the audit-trail requirement in Rule
17a-4(f), as proposed to be amended. Moreover, small broker-dealers
could continue to preserve records on electronic recordkeeping systems
that meet the WORM requirement.
    The proposed replacement of the required third-party access and
undertakings requirements in Rule 17a-4(f) with a requirement that a
senior officer of the broker-dealer have the access and make the
required undertakings should reduce the burden

on small broker-dealers because they will be able to use an internal
resource at no marginal cost rather than an external source to comply
with the requirement.
    The proposed amendments to Rule 17a-4(j) that would require a
broker-dealer to furnish a record and its audit trail (if applicable)
preserved on an electronic recordkeeping system pursuant Rule 17a-4(f)
in a reasonably usable electronic format, if requested by a
representative of the Commission, should not impose a burden on small
entities.

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission does not believe that the proposed amendments
impacting smaller entities that are broker-dealers would duplicate,
overlap, or conflict with other Federal Rules.

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives
that would accomplish its stated objective, while minimizing any
significant economic impact on small entities. The Commission
considered the following alternatives for small entities in relation to
our proposal: (1) Exempting broker-dealers that are small entities from
the proposed requirements, to account for resources available to small
entities; (2) establishing different requirements, including frequency,
to account for resources available to small entities; (3) clarifying,
consolidating, or simplifying the compliance requirements under the
proposal for small entities; and (4) using performance rather than
design standards.
    The Commission considered exempting broker-dealers that are small
entities from the proposal and considered establishing different
requirements for these firms.\197\ However, the Commission elected not
to do so for a number of reasons, including: (1) The option for small
entities to keep their records in paper or micrographic media, rather
than electronically; (2) the importance of establishing requirements
for reliable and secure electronic recordkeeping systems for broker-
dealers; (3) the availability of multiple third-party vendors to
provide the electronic recordkeeping services; and (4) the ability of
small entities to continue to use existing WORM-compliant electronic
recordkeeping systems.
---------------------------------------------------------------------------

    \197\ As stated above, the Commission does not believe any SBS
Entities qualify as ``small entities'' for the purposes of the RFA.
---------------------------------------------------------------------------

    In this vein, the Commission considered proposing the elimination
of the WORM alternative and requiring all broker-dealers and nonbank
SBS Entities to comply with an audit-trail requirement. This
alternative would require all affected entities to modernize their
recordkeeping systems to meet the audit-trail requirement. While this
alternative could produce long-term compliance efficiencies for a
greater number of affected participants, it would also require all
affected entities with WORM-compliant systems to upgrade their
electronic recordkeeping systems. The Commission elected not to propose
this alternative given its preliminary belief that the accompanying
compliance costs could be particularly burdensome for smaller entities
and that the alternative could have a disproportionate effect on
smaller and medium-sized broker-dealers.\198\
---------------------------------------------------------------------------

    \198\ See section IV.D. of this release (analyzing the potential
costs of alternatives to the rule amendments the Commission is
proposing).
---------------------------------------------------------------------------

    1. The Commission also considered simplifying compliance by
proposing performance rather than design standards similar to the
approach taken by the CFTC. The CFTC amended the electronic
recordkeeping requirements by replacing prescriptive requirements for
electronic recordkeeping systems with a principles-based approach.\199\
The Commission believes that its proposed rule amendments, establishing
electronic recordkeeping requirements for broker-dealers should provide
greater protection to the original records created and preserved by
broker-dealers, thereby giving regulators more reliable and secure
access to those records. Unlike the CFTC's rules, the Commission's
proposal retains the WORM standard, which requires electronic records
to be maintained exclusively in a non-rewriteable, non-erasable format.
The audit-trail alternative would require that the electronic records
be preserved in a manner that permits the recreation of an original
record if it is altered, over-written, or erased. Moreover, the
Commission believes that its proposal addresses the same concerns
addressed in the CFTC proposal, namely the security and authenticity of
and access to records.\200\ For these reasons, the Commission
determined not to propose principles-based rules.
---------------------------------------------------------------------------

    \199\ See CFTC Electronic Recordkeeping Release, 82 FR at 24480.
    \200\ Compare Rule 17a-4(f), as proposed to be amended, and Rule
18a-6(e), as proposed to be amended, with CFTC Section 1.31(d)(2).
---------------------------------------------------------------------------

G. Request for Comment

    The Commission encourages the submission of comments with respect
to any aspect of this initial RFA analysis. In particular, the
Commission requests comment regarding:
    1. Whether there are more efficient or less burdensome ways for the
Commission to modernize the electronic recordkeeping requirements for
registrants compared to what the Commission has proposed;
    2. The number of small entities that may be affected by the
proposed rule amendments; and
    3. Whether there are any Federal rules that duplicate, overlap, or
conflict with the proposed amendments.

VII. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA,'') \201\ the Commission must advise the OMB as
to whether the proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in:
---------------------------------------------------------------------------

    \201\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effect on competition, investment or
innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed
for 60 days pending Congressional review.
    The Commission requests comment on the potential impact of the
amendments to Rules 17a-5(f) and (j) and Rules 18a-6(e) and (g) on:
    1. The U.S. economy on an annual basis,
    2. Any potential increase in costs or prices for consumers or
individual industries, and
    3. Any potential effect on competition, investment, or innovation.
    Commenters are requested to provide empirical data and other
factual support for their view to the extent possible.

VIII. Statutory Authority

    The Commission is revising Rules 17a-4 and 18a-6 under the Exchange
Act (17 CFR 240.17a-4 and 17 CFR 240.18a-6) pursuant to the authority
conferred by the Exchange Act, including Sections 15F and 17.

List of Subjects in 17 CFR Part 240

    Brokers, Confidential business information, Fraud, Reporting and
recordkeeping requirements, Securities.

Text of Rule Amendments

    For the reasons set out in the preamble, the Commission is
proposing to amend title 17, chapter II of the Code of Federal
Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The authority citation for part 240 continues to read, in part, as
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.17a-4 also issued under secs. 2, 17, 23(a), 48 Stat.
897, as amended; 15 U.S.C. 78a, 78d-1, 78d-2; sec. 14, Pub. L. 94-
29, 89 Stat. 137 (15 U.S.C. 78a); sec. 18, Pub. L. 94-29, 89 Stat.
155 (15 U.S.C. 78w);
* * * * *
0
2. Amend Sec.  240.17a-4 by revising paragraphs (f) and (j) to read as
follows:

Sec.  240.17a-4  Records to be preserved by certain exchange members,
brokers and dealers.

* * * * *
    (f) The records required to be maintained and preserved pursuant to
Sec. Sec.  240.17a-3 and 240.17a-4 may be immediately produced or
reproduced by means of an electronic recordkeeping system or by means
of micrographic media subject to the conditions set forth in this
paragraph and be maintained and preserved for the required time in that
form.
    (1) For purposes of this paragraph,
    (i) The term micrographic media means microfilm or microfiche, or
any similar medium; and
    (ii) The term electronic recordkeeping system means a system that
preserves records in a digital format and that requires a computer to
access the records.
    (2) An electronic recordkeeping system must:
    (i)(A) Preserve the records for the duration of their applicable
retention periods in a manner that maintains a complete time-stamped
audit trail that includes:
    (1) All modifications to and deletions of a record or any part
thereof;
    (2) The date and time of operator entries and actions that create,
modify, or delete the record;
    (3) The individual(s) creating, modifying, or deleting the record;
and
    (4) Any other information needed to maintain an audit trail of each
distinct record in a way that maintains security, signatures, and data
to ensure the authenticity and reliability of the record and will
permit re-creation of the original record and interim iterations of the
record; or
    (B) Preserve the records exclusively in a non-rewriteable, non-
erasable format;
    (ii) Verify automatically the completeness and accuracy of the
processes for storing and retaining records electronically;
    (iii) If applicable, serialize the original and duplicate units of
the storage media, and time-date for the required period of retention
the information placed on such electronic storage media; and
    (iv) Have the capacity to readily download and transfer copies of a
record and its audit trail (if applicable) in both a human readable
format and in a reasonably usable electronic format and to readily
download and transfer the information needed to locate the electronic
record, as required by the staffs of the Commission, the self-
regulatory organizations of which the member, broker, or dealer is a
member, or any State securities regulator having jurisdiction over the
member, broker or dealer.
    (3) A member, broker, or dealer using an electronic recordkeeping
system must:
    (i) At all times have available, for examination by the staffs of
the Commission, the self-regulatory organizations of which the member,
broker, or dealer is a member, or any State securities regulator having
jurisdiction over the member, broker or dealer facilities for immediate
production of records preserved by means of the electronic
recordkeeping system and for producing copies of those records;
    (ii) Be ready at all times to provide, and immediately provide, any
record or information needed to locate records stored by means of the
electronic recordkeeping system that the staffs of the Commission, the
self-regulatory organizations of which the member, broker, or dealer is
a member, or any State securities regulator having jurisdiction over
the member, broker or dealer may request;
    (iii) Maintain a backup electronic recordkeeping system that meets
the other requirements of this paragraph (f) and that retains the
records required to be maintained and preserved pursuant to Sec. Sec.
240.17a-3 and 240.17a-4 in accordance with this section;
    (iv) Organize and maintain information necessary to locate records
maintained by the electronic recordkeeping system;
    (v)(A) Have in place an auditable system of controls that records,
among other things: (1) Each input, alteration, or deletion of a
record;
    (2) The names of individuals inputting, altering, or deleting a
record; and
    (3) The date and time such individuals input, altered, or deleted
the record;
    (B) At all times be able to produce a record of the results of the
audit of the system of controls for examination by the staffs of the
Commission, the self-regulatory organizations of which the member,
broker, or dealer is a member, or any State securities regulator having
jurisdiction over the member, broker or dealer; and
    (C) Preserve the record of the results of the audit of the system
of controls for the retention period required for the associated
records;
    (vi) Maintain, keep current, and provide promptly upon request by
the staffs of the Commission, the self-regulatory organizations of
which the member, broker, or dealer is a member, or any State
securities regulator having jurisdiction over the member, broker or
dealer all information necessary to access and locate records preserved
by means of the electronic recordkeeping system; and
    (vii) Have at all times a senior officer of the member, broker, or
dealer (hereinafter, the ``undersigned''), who has independent access
to and the ability to provide records maintained and preserved on the
electronic recordkeeping system, file with the designated examining
authority for the member, broker or dealer the following undertakings
with respect to such records:

    The undersigned hereby undertakes to furnish promptly to the
U.S. Securities and Exchange Commission (``Commission''), its
designees or representatives, any self- regulatory organization of
which [Name of the Member, Broker, or Dealer] is a member, or any
State securities regulator having jurisdiction over [Name of the
Member, Broker, or Dealer], upon reasonable request, such
information as is deemed necessary by the staff of the Commission,
any self-regulatory organization of which [Name of the Member,
Broker, or Dealer] is a member, or any State securities regulator
having jurisdiction over [Name of the Member, Broker, or Dealer],
and to download copies of

a record and its audit trail (if applicable) preserved by means of
an electronic recordkeeping system of [Name of the Member, Broker,
or Dealer] into both a human readable format and a reasonably usable
electronic format in the event of a failure on the part of [Name of
the Member, Broker, or Dealer] to download a requested record or its
audit trail (if applicable).
    Furthermore, the undersigned hereby undertakes to take
reasonable steps to provide access to the information preserved by
means of an electronic recordkeeping system of [Name of the Member,
Broker, or Dealer], including, as appropriate, downloading any
record required to be maintained and preserved by [Name of the
Member, Broker, or Dealer] pursuant to Sec. Sec.  240.17a-3 and
240.17a-4 in a format acceptable to the staff of the Commission, any
self-regulatory organization of which [Name of the Member, Broker,
or Dealer] is a member, or any State securities regulator having
jurisdiction over [Name of the Member, Broker, or Dealer].
Specifically, the undersigned will take reasonable steps that, in
the event of a failure on the part of [Name of the Member, Broker,
or Dealer] to download the record into a human readable format or a
reasonably usable electronic format and after reasonable notice to
[Name of the Member, Broker, or Dealer], the undersigned will
download the record into a human readable format or a reasonably
usable electronic format at the request of the staff of the staffs
of the Commission, any self-regulatory organization of which [Name
of the Member, Broker, or Dealer] is a member, or any State
securities regulator having jurisdiction over [Name of the Member,
Broker, or Dealer].

    (4) A broker-dealer using a micrographic media system must:
    (i) At all times have available, for examination by the staffs of
the Commission, self-regulatory organizations of which it is a member,
and any State securities regulator having jurisdiction over the member,
broker or dealer, facilities for immediate, easily readable projection
or production of micrographic media and for producing easily readable
images;
    (ii) Be ready at all times to provide, and immediately provide, any
facsimile enlargement which the staffs of the Commission, any self-
regulatory organization of which it is a member, or any State
securities regulator having jurisdiction over the member, broker or
dealer may request;
    (iii) Store, separately from the original, a duplicate copy of the
record stored on any medium acceptable under Sec.  240.17a-4 for the
time required; and
    (iv) Organize and index accurately all information maintained on
both original and duplicate storage media.
    (A) At all times, a member, broker, or dealer must be able to have
such indexes available for examination by the staffs of the Commission,
the self-regulatory organizations of which the broker or dealer is a
member, and any State securities regulator having jurisdiction over the
member, broker or dealer.
    (B) Each index must be duplicated and the duplicate copies must be
stored separately from the original copy of each index.
    (C) Original and duplicate indexes must be preserved for the time
required for the indexed records.
* * * * *
    (j) Every member, broker and dealer subject to this section must
furnish promptly to a representative of the Commission legible, true,
complete, and current copies of those records of the member, broker or
dealer that are required to be preserved under this section, or any
other records of the member, broker or dealer subject to examination
under section 17(b) of the Act (15 U.S.C. 78q(b)) that are requested by
the representative of the Commission. The member, broker, or dealer
must furnish a record and its audit trail (if applicable) preserved on
an electronic recordkeeping system pursuant to paragraph (f) of this
section in a reasonably usable electronic format, if requested by a
representative of the Commission.
* * * * *
0
3. Amend Sec.  240.18a-6 by revising paragraphs (e) and (g) to read as
follows:

Sec.  240.18a-6  Records to be preserved by certain security-based swap
dealers and major security-based swap participants.

* * * * *
    (e) The records required to be maintained and preserved pursuant to
Sec. Sec.  240.18a-5 and 240.18a-6 may be immediately produced or
reproduced by means of an electronic recordkeeping system subject to
the conditions set forth in this paragraph and be maintained and
preserved for the required time in that form.
    (1) For purposes of this paragraph, the term electronic
recordkeeping system means a system that preserves records in a digital
format and that requires a computer to access the records.
    (2) An electronic recordkeeping system of a security-based swap
dealer or major security-based swap participant without a prudential
regulator must:
    (i)(A) Preserve the records for the duration of their applicable
retention periods in a manner that maintains a complete time-stamped
audit trail that includes:
    (1) All modifications to and deletions of a record or any part
thereof;
    (2) The date and time of operator entries and actions that create,
modify, or delete the record;
    (3) The individual(s) creating, modifying, or deleting the record;
and
    (4) Any other information needed to maintain an audit trail of each
distinct record in a way that maintains security, signatures, and data
to ensure the authenticity and reliability of the record and will
permit re-creation of the original record and interim iterations of the
record; or
    (B) Preserve the records exclusively in a non-rewriteable, non-
erasable format;
    (ii) Verify automatically the completeness and accuracy of the
processes for storing and retaining records electronically;
    (iii) If applicable, serialize the original and duplicate units of
the storage media, and time-date for the required period of retention
the information placed on such electronic storage media; and
    (iv) Have the capacity to readily download and transfer copies of a
record and its audit trail (if applicable) in both a human readable
format and in a reasonably usable electronic format and to readily
download and transfer the information needed to locate the electronic
record, as required by the staffs of the Commission, or any State
regulator having jurisdiction over the security-based swap dealer or
major security-based swap participant.
    (3) A security-based swap dealer or major security-based swap
participant using an electronic recordkeeping system must:
    (i) At all times have available, for examination by the staffs of
the Commission or any State regulator having jurisdiction over the
security-based swap dealer or major security-based swap participant,
facilities for immediate production of records preserved by means of
the electronic recordkeeping system and for producing copies of those
records;
    (ii) Be ready at all times to provide, and immediately provide, any
record or information needed to locate records stored by means of the
electronic recordkeeping system that the staffs of the Commission or
any State regulator having jurisdiction over the security-based swap
dealer or major security-based swap participant may request;
    (iii) Maintain a backup electronic recordkeeping system that meets
the other requirements of this paragraph (e), as applicable, and that
retains the records required to be maintained and preserved pursuant to
Sec. Sec.  240.18a-5 and 240.18a-6 in accordance with this section;

    (iv) Organize and maintain information necessary to locate records
maintained by the electronic recordkeeping system; and
    (v)(A) Have in place an auditable system of controls that records,
among other things: (1) Each input, alteration, or deletion of a
record;
    (2) The names of individuals inputting, altering, or deleting a
record; and
    (3) The date and time such individuals input, altered, or deleted
the record;
    (B) At all times be able to produce a record of the results of the
audit of the system of controls for examination by the staffs of the
Commission or any State regulator having jurisdiction over the
security-based swap dealer or major security-based swap participant;
and
    (C) Preserve the record of the results of the audit of the system
of controls for the retention period required for the associated
records;
    (vi) Maintain, keep current, and provide promptly upon request by
the staffs of the Commission or any State regulator having jurisdiction
over the security-based swap dealer or major security-based swap
participant all information necessary to access and locate records
preserved by means of the electronic recordkeeping system; and
    (vii) Have at all times a senior officer of the security-based swap
dealer or major security-based swap participant (hereinafter, the
``undersigned''), who has independent access to and the ability to
provide records maintained and preserved on the electronic
recordkeeping system, file with the Commission the following
undertakings with respect to such records:

    The undersigned hereby undertakes to furnish promptly to the
U.S. Securities and Exchange Commission (``Commission'') and its
designees or representatives, or any State securities regulator
having jurisdiction over [Name of the Security-Based Swap Dealer or
Major Security-Based Swap Participant], upon reasonable request,
such information as is deemed necessary by the staff of the
Commission or any State regulator having jurisdiction over [Name of
the Security-Based Swap Dealer or Major Security-Based Swap
Participant], to download copies of a record and its audit trail (if
applicable) preserved by means of an electronic recordkeeping system
of [Name of the Security-Based Swap Dealer or Major Security-Based
Swap Participant] into both a human readable format and a reasonably
usable electronic format in the event of a failure on the part of
[Name of the Security-Based Swap Dealer or Major Security-Based Swap
Participant] to download a requested record or its audit trail (if
applicable).
    Furthermore, the undersigned hereby undertakes to take
reasonable steps to provide access to the information preserved by
means of an electronic recordkeeping system of [Name of the
Security-Based Swap Dealer or Major Security-Based Swap
Participant], including, as appropriate, downloading any record
required to be maintained and preserved by [Name of the Security-
Based Swap Dealer or Major Security-Based Swap Participant] pursuant
to Sec. Sec.  240.18a-5 and 240.18a-6 in a format acceptable to the
staff of the Commission or any State regulator having jurisdiction
over [Name of the Security-Based Swap Dealer or Major Security-Based
Swap Participant]. Specifically, the undersigned will take
reasonable steps that, in the event of a failure on the part of
[Name of the Security-Based Swap Dealer or Major Security-Based Swap
Participant] to download the record into a human readable format or
a reasonably usable electronic format and after reasonable notice to
[Name of the Security-Based Swap Dealer or Major Security-Based Swap
Participant], the undersigned will download the record into a human
readable format or a reasonably usable electronic format at the
request of the staff of the Commission or any State regulator having
jurisdiction [Name of the Security-Based Swap Dealer or Major
Security-Based Swap Participant].

* * * * *
    (g) Every security-based swap dealer and major security-based swap
participant subject to this section must furnish promptly to a
representative of the Commission legible, true, complete, and current
copies of those records of the security-based swap dealer or major
security-based swap participant that are required to be preserved under
this section, or any other records of the security-based swap dealer or
major security-based swap participant subject to examination or
required to be made or maintained pursuant to section 15F of the Act
that are requested by a representative of the Commission. The security-
based swap dealer and major security-based swap participant must
furnish a record and its audit trail (if applicable) preserved on an
electronic recordkeeping system pursuant to paragraph (e) of this
section in a reasonably usable electronic format, if requested by a
representative of the Commission.
* * * * *

    By the Commission.

    Dated: November 18, 2021.
Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-25840 Filed 11-30-21; 8:45 am]
BILLING CODE 8011-01-P