those repositories. This does not mean the Designated Executive Officer
must personally have this information at hand at all times. The firm
should have documentation identifying the locations where its records
are stored in order to meet its regulatory obligations with respect to
the records.\184\ The Designated Executive Officer can rely on that
documentation. In addition, under the final rule, the Designated
Executive Officer can rely on a designated officer or designated
specialist to provide details such as passwords necessary to access the
records.
---------------------------------------------------------------------------

    \182\ See paragraph (f)(3)(v)(C) of Rule 17a-4 and paragraph
(e)(3)(v)(C) of Rule 18a-6, as amended.
    \183\ SIFMA Letter.
    \184\ To the extent this information is recorded in a memorandum
or an agreement, the broker-dealer or nonbank SBS Entity would need
to preserve the documentation pursuant to the requirements of
paragraph (b)(4) or (7) of Rule 17a-4 or paragraph (b)(1)(iv) or
(vii) of Rule 18a-6, respectively.
---------------------------------------------------------------------------

    Under the final amendments, a broker-dealer or SBS Entity has the
option to designate a third party (``Designated Third Party'') to make
the required undertakings in lieu of designating an executive
officer.\185\ Thus, broker-dealers can continue to use a third party to
meet the requirement. However, because the final amendments modify the
form of the undertakings, broker-dealers that elect to use the
Designated Third Party option will need to file updated undertakings
with their DEAs.
---------------------------------------------------------------------------

    \185\ See paragraph (f)(3)(v)(A) of Rule 17a-4 and paragraph
(e)(3)(v)(A) of Rule 18a-6, as amended. To distinguish the
Designated Third Party from the Designated Executive Officer, the
final amendments define a ``designated third party'' as ``a person
that is not affiliated with the broker-dealer or SBS Entity who has
access to and the ability to provide records maintained and
preserved on the electronic recordkeeping system.'' See paragraph
(f)(1)(vi) of Rule 17a-4 and paragraph (e)(1)(v) of Rule 18a-6, as
amended. This definition is consistent with the requirements for a
third party prior to the amendments and, therefore, entities that
are serving as Designated Third Parties prior to the amendments
should be able to continue doing so.
---------------------------------------------------------------------------

    For these reasons and the reasons stated in the proposing release,
the Commission is adopting the undertakings requirements with the
modifications discussed above.\186\
---------------------------------------------------------------------------

    \186\ See paragraph (f)(3)(v) of Rule 17a-4 and paragraph
(e)(3)(v) of Rule 18a-6, as amended.
---------------------------------------------------------------------------

    Finally, the Commission received several comments regarding the
potential process of transitioning from the current rules to the rules
as proposed, were they to be adopted.\187\ Two commenters stated that
the proposing release was unclear on how firms should transition from
their current WORM-based electronic recordkeeping systems, stating that
the removal of the requirement for a third-party undertaking could
result in ``challenges'' arising from the process of terminating a
third-party relationship with a WORM recordkeeping provider. These two
commenters also requested ``guidance and clarification'' as to whether
a broker-dealer would be required to rescind or withdraw its prior
undertakings, notices, or WORM representations or whether a broker-
dealer would need to notify the Commission before transitioning to
another compliant alternative.\188\
---------------------------------------------------------------------------

    \187\ See Committee of Annuity Issuers Letter; FSI Letter; SIFMA
Letter.
    \188\ See Committee of Annuity Issuers Letter; FSI Letter.
---------------------------------------------------------------------------

    As discussed above, broker-dealers will need to file new
undertakings with their DEAs as a result of the final amendments
regardless of whether they switch to using a Designated Executive

Officer, switch to using a different Designated Third Party, or
continue to use their existing Designated Third Party. Similarly, under
Rule 17a-4(i) prior to these amendments, broker-dealers needed to file
new undertakings if they switched to using a different Designated Third
Party. In filing the new undertakings, broker-dealers may indicate that
they are replacing the previously filed undertakings. Further, in
response to the request for clarification, the broker-dealer need not
notify the Commission that it is switching from a WORM-compliant
electronic recordkeeping system to an audit trail-compliant electronic
recordkeeping service.

F. Requirements for Broker-Dealers Using Micrographic Media To Preserve
Records

    Rule 17a-4(f) permits broker-dealers to maintain and preserve
Broker-Dealer Regulatory Records on micrographic media. The rule
defines the term micrographic media as microfilm or microfiche, or any
similar medium.\189\ The current requirements for broker-dealers using
micrographic media are set forth in paragraphs (f)(3)(i) through (iv)
of Rule 17a-4, which also set forth requirements for broker-dealers
using electronic storage media. The Commission proposed to move these
requirements to new paragraph (f)(4) of Rule 17a-4.\190\ One commenter
expressed support for retaining the micrographic media provisions in
Rule 17a-4.\191\
---------------------------------------------------------------------------

    \189\ See paragraph (f)(1)(i) of Rule 17a-4.
    \190\ See Proposing Release, 86 FR at 68311.
    \191\ See NRS Letter.
---------------------------------------------------------------------------

    For the reasons stated in the proposing release,\192\ the
Commission is adopting the micrographic media amendments as
proposed.\193\
---------------------------------------------------------------------------

    \192\ See Proposing Release, 86 FR at 68311.
    \193\ See paragraph (f)(4) of Rule 17a-4, as amended.
---------------------------------------------------------------------------

G. Requirements for Certain Third Parties That Maintain Broker-Dealer
or SBS Entity Regulatory Records

    Paragraph (i) of Rule 17a-4 (``Rule 17a-4(i)'') and paragraph (f)
of Rule18a-6 (``Rule 18a-6(f)'') require a third party who prepares or
maintains Broker-Dealer Regulatory Records or SBS Regulatory Records
(regardless of whether the records are in paper or electronic form) to
file a written undertaking with the Commission signed by a duly
authorized person (``Traditional Undertaking'').\194\ The Traditional
Undertaking must include a provision whereby the third party agrees,
among other things, to permit examination of the records by
representatives or designees of the Commission as well as to promptly
furnish to the Commission or its designee true, correct, complete, and
current hard copies of any or all or any part of such books and
records. The rules further provide that an agreement with the third
party will not relieve the broker-dealer or SBS Entity from the
responsibility to prepare and maintain the Broker-Dealer Regulatory
Records or the SBS Regulatory Records, respectively.\195\
---------------------------------------------------------------------------

    \194\ Rule 17a-4(i) currently uses the term ``outside entity''
whereas paragraph (f)(1) of Rule 18a-6 currently uses the term
``third party.'' Consequently, the amendments to paragraph (i) of
Rule 17a-4 discussed below permitting the Alternative Undertaking
also use the term ``outside entity'' to be consistent with the
existing text of the rule. See paragraph (i)(1)(ii) of Rule 17a-4,
as amended. The term ``outside entity'' has the same meaning as the
term ``third party.'' In both cases, the terms mean a person other
than the broker-dealer or SBS Entity. For the purposes of the
discussion of the amendments permitting the Alternative Undertaking
in this release, the Commission is using the term ``third party.''
    \195\ See paragraph (i)(2) of Rule 17a-4 and paragraph (f)(2) of
Rule 18a-6. As noted above, paragraph (f)(1) of Rule 18a-6(f)
currently uses the term ``third party.'' However, paragraph (f)(2)
uses the term ``outside entity.'' To be consistent, the Commission
is amending paragraph (f)(2) of Rule 18a-6 to replace the term
``outside entity'' with the term ``third party.'' See paragraph
(f)(2) of Rule 18a-6, as amended.
---------------------------------------------------------------------------

    Commenters stated that cloud service providers do not have the
ability to make the Traditional Undertaking required by Rules 17a-4(i)
and 18a-6(f).\196\ One commenter stated that ``[s]ince cloud storage is
similar to storing the records in-house with respect to who can access
the records, it is generally not possible for a third-party provider to
produce any records in an electronic format (much less a ``hard copy'')
given that such files are often encrypted and accessible only by the
Regulated Entity.'' \197\ Another commenter stated, ``[i]mportantly,
unlike Regulated Entities using the types of service providers
specified in Rule 17a-4(i) (i.e., outside service bureau, depository,
or bank), customers using cloud services maintain ownership and control
of their content, including control over . . . who has access to their
accounts and content, and how those access rights are granted, managed,
and revoked.'' \198\ A third commenter stated that ``many broker-
dealers struggle to find outside recordkeeping vendors willing to
provide the Traditional Undertaking and that ``many cloud service
providers . . . do not have the ability to make the [Traditional
Undertaking], as these files are typically encrypted and only
accessible by the broker-dealer firm using the cloud storage
services.'' This commenter further stated that ``given the inability
for cloud providers to make (or, in some cases, their refusal to assume
liability for making) the [Traditional Undertaking], the SEC should
consider relaxing or eliminating this undertaking entirely.'' \199\ An
additional commenter stated that ``[w]hile Rule 17a-4(i) was likely
written with hardcopy (paper) records in mind, it does not specifically
mention paper or any other medium.'' This commenter added that ``[a]s
the brokerage industry (along with its self-regulatory organization,
the Financial Industry Regulatory Authority (FINRA)) moves away from
maintaining paper records, and is increasingly employing cloud based
solutions, this undertaking is now outdated and does not represent
current recordkeeping approaches and configurations.'' \200\
---------------------------------------------------------------------------

    \196\ See AWS Letter; Committee of Annuity Insurers Letter;
Fidelity Letter; FSI Letter; SIFMA Letter.
    \197\ SIFMA Letter.
    \198\ AWS Letter (emphasis in original).
    \199\ Committee of Annuity Insurers Letter.
    \200\ Fidelity Letter.
---------------------------------------------------------------------------

    The commenters have pointed out a significant difference in how
traditional records custodians maintain records for their clients
compared to how cloud service providers maintain records for their
clients. Namely, traditional records custodians control access to the
records whereas cloud service providers give their clients the ability
to remotely access the records and to encrypt the records. Nonetheless,
if a broker-dealer or SBS Entity uses a cloud service provider to
maintain Broker-Dealer Regulatory Records or SBS Entity Regulatory
Records, the current requirements of Rules 17a-4(i) and 18a-6(f),
respectively, are implicated because a third party (rather than the
broker-dealer or SBS Entity) is holding the records. Moreover, while
the broker-dealer or SBS Entity may be able to access the records
remotely, the cloud service provider can block that access. In this
way, the cloud service provider can control access to the records.
Therefore, under the existing requirements of Rules 17a-4(i) and 18a-
6(f), the broker-dealer or SBS Entity must have the cloud service
provider execute the Traditional Undertaking.
    However, the requirements of Rule 17a-4(i) pre-date the use of
cloud service providers by broker-dealers. Moreover, Rule 18a-6(f) was
modelled on Rule 17a-4(i) and, therefore, similarly was not designed to
address the use of cloud service providers by

SBS Entities.\201\ One of the goals of this rulemaking is to make Rules
17a-4 and 18a-6 more technology neutral.\202\ The objective is to
prescribe rules that remain workable as record maintenance and
preservation technologies evolve over time but also to set forth
requirements designed to ensure that broker-dealers and SBS Entities
maintain and preserve records in a manner that promotes their
integrity, authenticity, and accessibility. In light of the comments
and the emerging use of cloud service providers by broker-dealers and
SBS Entities, the Commission is adopting amendments to Rules 17a-4(i)
and 18a-6(f).\203\ The amendments permit a cloud service provider to
make an alternative undertaking that is tailored to how cloud service
providers maintain records for broker-dealers and SBS Entities
(``Alternative Undertaking'') in lieu of the Traditional Undertaking.
At the same time, the amendments are designed to ensure that the
records are accessible and can be examined by the representatives and
designees of the Commission and produced by the broker-dealer or SBS
Entity to the representatives and designees of the Commission.
---------------------------------------------------------------------------

    \201\ See SBSD/MSBSP Recordkeeping Proposing Release, 79 FR at
25219-20; SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68569-
70.
    \202\ See Proposing Release, 86 FR at 68301.
    \203\ See paragraph (i)(1)(ii) of Rule 17a-4 and paragraph
(f)(1)(ii) of Rule 18a-6, as amended. Because the amendments are set
forth in new paragraph (i)(1)(ii) of Rule 17a-4 and paragraph
(f)(1)(ii) of Rule 18a-6, current paragraph (i)(1) of Rule 17a-4 and
paragraph (f)(1) of Rule 18a-6 are being re-lettered paragraphs
(i)(1)(i) and (f)(1)(i), respectively. In light of these amendments,
the Commission is amending the existing requirements of current
paragraph (i)(1) of Rule 17a-4 and paragraph (f)(1) of Rule 18a-6 to
add text explicitly identifying entities that provide cloud services
as third-party record custodians under Rules 17a-4(i) and 18a-4(f)
(in particular, the amendments add the phrase ``, including a
recordkeeping service that owns and operates the servers or other
storage devices on which the records are preserved or maintained,''
after the phrase ``or other recordkeeping service'' in Rule 17a-4(i)
and the phrase ``, including by a third party that owns and operates
the servers or other storage devices on which the records are
preserved or maintained,'' after the phrase ``or maintained by a
third party'' in Rule 18a-4(f). See paragraph (i)(1)(i) of Rule 17a-
4 and paragraph (f)(1)(i) of Rule 18a-6, respectively, as amended.
---------------------------------------------------------------------------

    Under the amendments, a third party may file the Alternative
Undertaking (the format of which is discussed below) in lieu of the
Traditional Undertaking if the Broker-Dealer Regulatory Records or SBS
Regulatory Records are maintained and preserved by means of an
electronic recordkeeping system as defined in Rules 17a-4(f) and 18a-
6(e), respectively, utilizing servers or other storage devices that are
owned or operated by a third party (including an affiliate of the
broker-dealer or SBS Entity) \204\ and the broker-dealer or SBS Entity
has independent access to the records.\205\ Thus, the ability to
provide the Alternative Undertaking does not apply when the third party
maintains Broker-Dealer Regulatory Records or SBS Regulatory Records in
paper format or on micrographic media. This limitation is based on the
fact that some electronic records held by a third party can nonetheless
be accessed remotely (e.g., from the premises of the broker-dealer or
SBS Entity) and downloaded to a local server (e.g., one owned and
operated by the broker-dealer or SBS Entity). Records stored in paper
form or on micrographic media cannot be accessed remotely--one must
travel to the site where the records are held to access or retrieve
them. Therefore, accessing the records requires the cooperation of the
third party to either permit a representative or designee of the
Commission to enter the site where the records are stored to examine
them or to produce a hard copy of the records to the representative or
designee. For these reasons, third parties that hold Broker-Dealer
Regulatory Records or SBS Entity Regulatory Records in paper format or
on micrographic media will continue to be required to provide the
Traditional Undertaking set forth in amended paragraph (i)(1)(i) of
Rule 17a-4 or paragraph (f)(1)(i) of Rule 18a-6, respectively. As
discussed above, the Traditional Undertaking must include a provision
whereby the third party agrees, among other things, to permit
examination of the records by representatives or designees of the
Commission as well as to promptly furnish to the Commission or its
designee true, correct, complete, and current hard copies of any or all
or any part of such books and records.
---------------------------------------------------------------------------

    \204\ The Commission has included this clarification in the rule
text to ensure that the requirements of the Alternative Undertaking
apply to every broker-dealer or SBS Entity that uses a third-party
provider, regardless of whether or not that third-party provider is
affiliated with the broker-dealer or SBS Entity.
    \205\ See paragraph (i)(1)(ii)(A) of Rule 17a-4 and paragraph
(f)(1)(ii)(A) of Rule 18a-6, as amended.
---------------------------------------------------------------------------

    As indicated above, a second condition to utilizing the Alternative
Undertaking is that the broker-dealer or SBS Entity must have
independent access to the records held by the third party. The fact
that the records are held by the third party in electronic form alone
is not enough to utilize the Alternative Undertaking. The final
amendments define ``independent access'' to mean that the broker-dealer
or SBS Entity can regularly access the records without the need of any
intervention by the third party and through such access unilaterally
take actions with the respect to the records held by the third party
that are contemplated by the Traditional Undertaking. Specifically, the
broker-dealer or SBS Entity must be able to permit examination of the
books and records at any time or from time to time during business
hours by representatives or designees of the Commission,\206\ and to
promptly furnish to the Commission or its designee a true, correct,
complete and current hard copy of any or all or any part of such
records.\207\
---------------------------------------------------------------------------

    \206\ See paragraph (i)(1)(ii)(B)(1) of Rule 17a-4 and paragraph
(f)(1)(ii)(B)(1) of Rule 18a-6, as amended. See also paragraph
(i)(1)(i) of Rule 17a-4 and paragraph (f)(1)(i) of Rule 18a-6, as
amended (setting forth the Traditional Undertaking requirement,
which provides, in pertinent part, that the third party must
undertake to permit examination of such books and records at any
time or from time to time during business hours by representatives
or designees of the Commission).
    \207\ See paragraph (i)(1)(ii)(B)(2) of Rule 17a-4 and paragraph
(f)(1)(ii)(B)(2) of Rule 18a-6, as amended. See also paragraph
(i)(1)(i) of Rule 17a-4 and paragraph (f)(1)(i) of Rule 18a-6, as
amended (setting forth the Traditional Undertaking requirement,
which provides, in pertinent part, that the third party must
undertake to promptly furnish to the Commission or its designee a
true, correct, complete and current hard copy of any or all or any
part of such records).
---------------------------------------------------------------------------

    Thus, the definition of independent access is designed to ensure
that the broker-dealer or SBS Entity can unilaterally provide the same
access to the records as agreed to by a third party executing the
Traditional Undertaking. This means that the broker-dealer or SBS
Entity must be able to make the records available for examination and
to produce hard copies of the records by accessing them remotely
without the need of any intervention by the third party that holds the
records. In effect, the broker-dealer must have the same access to the
records and capability to produce the records that would be the case if
the broker-dealer or SBS Entity held the records itself and not at a
third party. With this level of access, the Traditional Undertaking is
not necessary because Commission representatives and designees can
access the records through the broker-dealer or SBS Entity without the
need for the third party to take any intervening steps.
    If the conditions set forth under paragraphs (i)(1)(ii)(A) and (B)
of Rule 17a-4 and paragraphs (f)(1)(ii)(A) and (B) of Rule 18a-6, as
amended are met, the broker-dealer is permitted to have the third party
execute the Alternative Undertaking in lieu of the Traditional
Undertaking. The format of the

Alternative Undertaking is designed to account for how cloud service
providers maintain records for broker-dealers and SBS Entities but also
to promote the accessibility of those records to the Commission and
other securities regulators and, in the case of broker-dealers, to a
trustee appointed under SIPA. First, in the Alternative Undertaking,
the third party must acknowledge that the records are the property of
the broker-dealer or SBS Entity.\208\ The Traditional Undertaking has a
similar requirement to acknowledge the records are the property of the
broker-dealer or SBS Entity.\209\
---------------------------------------------------------------------------

    \208\ See paragraph (i)(1)(ii)(A) of Rule 17a-4 and paragraph
(f)(1)(ii)(A) of Rule 18a-6, as amended.
    \209\ See paragraph (i)(1)(i) of Rule 17a-4 and paragraph
(f)(1)(i) of Rule 18a-6, as amended.
---------------------------------------------------------------------------

    Second, the third party must acknowledge in the Alternative
Undertaking that the broker-dealer or SBS Entity has made three
representations to the third party.\210\ The broker-dealer or SBS
Entity could, for example, make these representations in the service
contract with the third party or an addendum to an existing service
contract. The first representation is that broker-dealer or SBS Entity
is subject to Commission rules governing the maintenance and
preservation of certain records. This representation, and the third
party's acknowledgement of it, are designed to alert the third party
that certain of the records held by the third party for the broker-
dealer or SBS Entity are subject to Federal securities laws
administered by the Commission and, therefore, to inform the third
party of the necessity and importance of maintaining the records in
compliance with those laws.
---------------------------------------------------------------------------

    \210\ See paragraph (i)(1)(ii)(A) of Rule 17a-4 and paragraph
(f)(1)(ii)(A) of Rule 18a-6, as amended.
---------------------------------------------------------------------------

    The second representation is that the broker-dealer or the SBS
Entity has independent access to the records maintained by the third
party.\211\ As discussed above, the final amendments define the term
``independent access'' and the broker-dealer or SBS Entity must have
independent access to the records in order to use the Alternative
Undertaking. It is the responsibility of the broker-dealer or SBS
Entity (not the third party) to ensure that its access to the records
maintained by the third party meets the definition of ``independent
access'' under the final amendments. This representation, and the third
party's acknowledgement of it, are designed to delineate the
obligations of the broker-dealer or SBS Entity and the third party;
namely, that it is the responsibility of the broker-dealer or SBS
Entity to make the records held by the third party available for
examination or to produce hard copies of the records (and not the
responsibility of the third party).
---------------------------------------------------------------------------

    \211\ See paragraph (i)(1)(ii)(A) of Rule 17a-4 and paragraph
(f)(1)(ii)(A) of Rule 18a-6, as amended.
---------------------------------------------------------------------------

    The third representation is that the broker-dealer or SBS Entity
consents to the third party fulfilling the obligations set forth in the
Alternative Undertaking.\212\ As discussed in the next paragraph, the
third party will need to agree to take or refrain from taking certain
actions in the Alternative Undertaking with respect to the records it
maintains for the broker-dealer or SBS Entity. This representation, and
the third party's acknowledgement of it, are designed to ensure that
the third party can fulfill these obligations under its arrangement
with the broker-dealer or the SBS Entity.
---------------------------------------------------------------------------

    \212\ See paragraph (i)(1)(ii)(A) of Rule 17a-4 and paragraph
(f)(1)(ii)(A) of Rule 18a-6, as amended.
---------------------------------------------------------------------------

    In addition to the acknowledgements, the third party must undertake
to facilitate within its ability, and not impede or prevent, the
examination, access, download, or transfer of the records
(collectively, ``records access'') by a representative or designee of
the Commission as permitted under the law.\213\ Further, in the case of
a broker-dealer, the third party also must undertake to facilitate
within its ability, and not impede or prevent, a trustee appointed
under SIPA to liquidate the broker-dealer in accessing, downloading, or
transferring the records as permitted under the law.\214\ These
undertakings are designed to address the fact that, while the broker-
dealer or SBS Entity has independent access to the records, the third
party owns and/or operates the servers or other storage devices on
which the records are stored. Therefore, the third party can block
records access. In the Alternative Undertaking, the third party will
need to agree not to take such an action. Further, the third party will
need to agree to facilitate within its ability records access. This
does not mean that the third party must produce a hard copy of the
records or take the other actions that are agreed to in the Traditional
Undertaking. Rather, it means that the third party undertakes to
provide to the Commission representative or designee or SIPA trustee
the same type of technical support with respect to records access that
it would provide to the broker-dealer or SBS Entity in the normal
course.
---------------------------------------------------------------------------

    \213\ See paragraph (i)(1)(ii)(A) of Rule 17a-4 and paragraph
(f)(1)(ii)(A) of Rule 18a-6, as amended.
    \214\ See paragraph (i)(1)(ii)(A) of Rule 17a-4. SBS Entities
are not members of SIPC.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting amendments to Rules
17a-4(i) and 18a-6(f) to provide an alternative to the Traditional
Undertaking to accommodate the use of cloud service providers by
broker-dealers and SBS Entities.\215\
---------------------------------------------------------------------------

    \215\ See paragraph (i)(1)(ii) of Rule 17a-4 and paragraph
(f)(1)(ii) of Rule 18a-6, as amended.
---------------------------------------------------------------------------

    The Commission notes that the Financial Industry Regulatory
Authority (``FINRA'') commented on the proposing release by reiterating
the concerns it has expressed in the past regarding the obligations of
third parties that maintain and preserve Broker-Dealer Regulatory
Records pursuant to Rule 17a-4(i).\216\ Specifically, FINRA staff has
``expressed concerns that broker-dealers are entering into contracts
with third-party recordkeeping service providers that have provisions
permitting the service provider to delete or discard the broker-
dealer's records required to be preserved pursuant to Rules 17a-3 and
17a-4, typically in response to non-payment by the broker-dealer of
fees due under the contract but also in other circumstances.'' \217\ In
adopting Rule 17a-4(i), the Commission emphasized that the records of a
broker-dealer must be available at all times for examination in order
to assure the protection of customers.\218\ Prior to adopting the rule,
the Commission had found that, in situations where a broker-dealer or
its service providers were experiencing financial difficulty, the
records of the broker-dealer had not always been available to the
broker-dealer or to the Commission. The Commission adopted Rule 17a-
4(i) ``to assure the accessibility of broker-dealer records in
situations where, for example, a service bureau refuses to surrender
the records due to nonpayment of fees.'' \219\ Contractual

provisions that would permit, among other things, a service provider to
withhold, delete, or discard records in the event of non-payment by the
broker-dealer are inconsistent with the retention requirements of Rule
17a-4 and the undertaking requirements of Rule 17a-4(i).\220\ Moreover,
if a third party deletes or discards a broker-dealer's records in a
manner that is not consistent with the retention requirements in Rule
17a-4, such action would constitute a primary violation of the rule by
the broker-dealer and may subject the service provider to secondary
liability for causing or aiding and abetting the violation. The same
holds true with respect to Rule 18a-6(f). The Commission clarifies that
any contractual provisions between a broker-dealer or SBS Entity and a
third-party service provider that would allow the latter to withhold,
delete, or discard records--electronic or otherwise--in the event of
non-payment by the broker-dealer or SBS Entity are inconsistent with
the retention requirements of Rule 17a-4 or 18a-6, as applicable, and
the undertaking requirements of Rule 17a-4(i) or 18a-6(f), as
applicable.
---------------------------------------------------------------------------

    \216\ See letter from Michael A. Macchiaroli, Associate
Director, Division of Trading and Markets, Commission, to Kris
Dailey, Vice President, Risk Oversight & Operational Regulation,
FINRA, dated Apr. 12, 2018. (``Third-Party Record Preservation
Letter''). FINRA serves as the examining authority for most broker-
dealers.
    \217\ Id.
    \218\ See Recordkeeping by Brokers and Dealers, Exchange Act
Release No. 13962 (Sept. 15, 1977), 42 FR 47551, 47552 (Sept. 21,
1977) (``17a-4(i) Adopting Release'').
    \219\ Id.; Filing of Agreements by Outside Service Bureaus,
Exchange Act Release No. 13273 (Feb. 16, 1977), 42 FR 10698, 10698
(Feb. 23, 1977). See also Statement Regarding the Maintenance of
Current Books and Records by Brokers and Dealers, Exchange Act
Release No. 10756 (Apr. 26, 1974), 39 FR 16440, 16441 (May 9, 1974)
(``If a broker-dealer hires or engages an outside service bureau or
other recordkeeping service to handle its records, the requirement
to make and keep current the broker-dealer's books and records is in
no way diminished and under such circumstances the broker-dealer is
responsible to the same degree for maintaining current books and
records as if he were maintaining them himself. Where a broker-
dealer undertakes to have his books and records prepared and
maintained by a service bureau or recordkeeping service, he should
assure himself that the service will be provided inconformity with
the Commission recordkeeping rules.'').
    \220\ See 17a-4(i) Adopting Release, 42 FR at 47551.
---------------------------------------------------------------------------

H. Requirement To Produce Electronic Records in a Reasonably Usable
Electronic Format

    Paragraph (j) of Rule 17a-4 (``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.\221\
Paragraph (g) of Rule 18a-6 (``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.\222\
---------------------------------------------------------------------------

    \221\ Section 17(b) of the Exchange Act provides, in pertinent
part, that all records of a broker-dealer are subject at any time,
or from time to time, to such reasonable periodic, special, or other
examinations by representatives of the Commission and the
appropriate regulatory agency for such persons as the Commission or
the appropriate regulatory agency for such persons deems necessary
or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the
Exchange Act. See 15 U.S.C. 78q(b).
    \222\ Section 15F(f)(1) of the Exchange Act provides, in
pertinent part, that SBSDs and MSBSPs shall keep books and records
required by Commission rule open to inspection and examination by
any representative of the Commission. See 15 U.S.C. 78o-10(f)(1).
---------------------------------------------------------------------------

    The Commission proposed to amend Rule 17a-4(j) to require that a
broker-dealer must furnish any record and its audit trail (if
applicable) preserved electronically pursuant to Rule 17a-4(f) in a
reasonably usable electronic format, if requested by a representative
of the Commission.\223\ The Commission similarly proposed to amend Rule
18a-6(g) to require SBS Entities to furnish any record preserved
electronically pursuant to Rule 18a-6(e) in a reasonably usable
electronic format, if requested by a representative of the Commission.
One commenter stated that the Commission ``should consider including a
minimal list of acceptable formats.'' \224\ In the interests of keeping
the requirements as technologically neutral as possible and not
identifying formats that could become obsolete, the Commission believes
it would not be appropriate to provide examples; however, it notes that
a reasonably usable electronic format would be a format that is common
and compatible with commonly used systems for accessing and reading
electronic records.
---------------------------------------------------------------------------

    \223\ See Proposing Release, 86 FR at 68311.
    \224\ NRS Letter.
---------------------------------------------------------------------------

    A commenter stated that the ``proposed amendments, requiring the
record and its audit trail, are appropriate, but only if explicitly
requested by a representative of the Commission.'' \225\ The commenter
explained that the amendment could ``be interpreted to mean that any
time a record is requested, and it is stored in an electronic
recordkeeping system, as proposed, the record's audit trail must also
be delivered.'' The objective of the amendments is to require the
broker-dealer or SBS Entity to provide records stored electronically in
a reasonably usable electronic format if requested by a representative
of the Commission and, if also requested by a representative of the
Commission, the audit trails of the records in a reasonably usable
electronic format. The request of the Commission representative will
govern whether the broker-dealer or SBS Entity must produce the record,
the audit trail of the record, or both the record and its audit trail.
---------------------------------------------------------------------------

    \225\ Id.
---------------------------------------------------------------------------

    For these reasons and the reasons stated in the proposing
release,\226\ the Commission is adopting the prompt production of
records amendments as proposed.\227\
---------------------------------------------------------------------------

    \226\ See Proposing Release, 86 FR at 68311.
    \227\ See paragraph (j) of Rule 17a-4 and paragraph (g) of Rule
18a-6, as amended.
---------------------------------------------------------------------------

I. Compliance Date

    A commenter stated that regulated entities should be given 18
months to comply with the rules as amended, stating, ``[t]his will give
Regulated Entities time to develop, implement, and test changes that
they believe will be necessary to comply with the amended rules'' and
that this ``is particularly acute for non-bank SBS Entities given that
they will now have to comply with either an audit trail or WORM
requirement for the first time.'' \228\ For the reasons discussed
below, the Commission is not setting the compliance date as 18 months
after publication in the Federal Register as suggested by the
commenter. Instead, for the reasons discussed below, the compliance
date for the amendments to Rule 17a-4 is six months after the
amendments are published in the Federal Register, while the compliance
date for the amendments to Rule 18a-6 is twelve months after the
amendments are published in the Federal Register.
---------------------------------------------------------------------------

    \228\ SIFMA Letter.
---------------------------------------------------------------------------

    Under the final amendments to Rule 17a-4, broker-dealers can
continue to use their existing WORM-compliant electronic recordkeeping
systems and transition to audit-trail compliant systems over time when
they are ready to implement an electronic recordkeeping system that
meets that requirement. However, the final amendments will require them
to be able to produce a record in a human readable and reasonably
usable electronic format. In addition, while they can continue to use
their existing Designated Third Party, updated undertakings will need
to be filed with the broker-dealer's DEAs because of the amendments to
the format of the undertakings. Also, if they use a cloud service
provider and a Traditional Undertaking from the provider has not been
filed with the Commission, a Traditional or Alternative Undertaking
will need to be filed.\229\ The Commission believes that these new
requirements--that is, ensuring that

records are produced in a human readable and reasonably usable
electronic format, filing updated undertakings with the DEAs, and, if
necessary, ensuring that a cloud service provider has filed a
Traditional or Alternative Undertaking with the Commission--are
relatively minor. The Commission believes that given that broker-
dealers themselves presumably need access to--and the ability to read--
their own records retained by means of an electronic recordkeeping
system, most, if not all, broker-dealer electronic records should
already be produced in a human readable and reasonably usable
electronic format. Furthermore, the Commission believes that since the
exact wording of the undertakings required to be updated or filed with
a broker-dealer's DEA or the Commission (whether by the broker-dealer
or its cloud service provider) is set forth in the rule text, executing
such undertakings should not be a particularly time-consuming activity.
Finally, the Commission believes that should any broker-dealers need to
amend their contractual agreements with their cloud service providers
to reflect the new requirements being adopted in this document, the
straightforward nature of the new requirements will mean that the
drafting and execution of any such contractual amendments should be a
simple matter. For these reasons, the Commission believes that six
months after publication in the Federal Register will be sufficient
time to come into compliance with these new requirements.
---------------------------------------------------------------------------

    \229\ If a cloud service provider has filed a Traditional
Undertaking on behalf of a broker-dealer or SBS Entity and the
conditions for filing the Alternative Undertaking can be met, the
cloud service provider could file the Alternative Undertaking to
replace the Traditional Undertaking.
---------------------------------------------------------------------------

    SBS Entities will be required to take more actions than broker-
dealers to come into compliance with the requirements. Under the
amendments to Rule 18a-6, nonbank SBS Entities that maintain and
preserve their records in an electronic format will need to implement
electronic recordkeeping systems that meet either the audit-trail or
WORM requirement. The Commission believes that SBS Entities will elect
to configure their electronic recordkeeping existing systems to meet
the audit-trail requirement, given the benefits of that approach.
Therefore, they may not need to build new electronic recordkeeping
systems. All SBS Entities will need to be able to produce a record and,
if applicable its audit trail, in a human readable and reasonably
usable electronic format. In addition, either Designated Executive
Officer or Designated Third Party undertakings will need to be filed
with the Commission with respect to all SBS Entities (unlike with
respect to broker-dealers, this is a new requirement). Also, if SBS
Entities use a cloud service provider and a Traditional Undertaking
from the provider has not been filed with the Commission, a Traditional
or Alternative Undertaking will need to be filed. Since, as noted
above, SBS Entities, unlike broker-dealers, were not subject to a
requirement that their electronic recordkeeping systems be WORM
compliant prior to the amendments being adopted in this document, the
Commission anticipates that some SBS Entities may have to configure
their existing electronic recordkeeping systems to either requirement.
Based on staff experience and given the relative size and
sophistication of SBS Entities, however, the Commission believes that
twelve months after publication in the Federal Register will be
sufficient time for SBS Entities to come into compliance with these new
requirements.
    For the foregoing reasons, the compliance date for the amendments
to Rule 17a-4 is six months after the amendments are published in the
Federal Register and the compliance date for the amendments to Rule
18a-6 is twelve months after the amendments are published in the
Federal Register.

III. Designation of Broker-Dealer Examining Authorities

    FINRA, which serves as the DEA for most broker-dealers, raised a
concern with the proposal to eliminate the third-party undertakings
requirement from Rule 17a-4(f).\230\ This commenter stated if a broker-
dealer refuses to provide records in the course of the examination or
investigation, the commenter has ``the ability to obtain the records
directly from the independent third party that has access to the
records consistent with Exchange Act Rule 17a-4(f)(3)(vii).'' The
commenter recommended that the Commission amend Rule 17a-4(i) to
expressly identify a broker-dealer's DEA as an entity to whom the
broker-dealer must make its records available and to whom the broker-
dealer must promptly furnish a true, correct, complete and current hard
copy of any or all or any part of such books and records.
---------------------------------------------------------------------------

    \230\ See FINRA Letter.
---------------------------------------------------------------------------

    As discussed above, the Traditional Undertaking set forth in Rule
17a-4(i) requires a third party who prepares or maintains Broker-Dealer
Regulatory Records to file a written undertaking with the Commission
signed by a duly authorized person.\231\ The Traditional Undertaking
must include a provision whereby the third party agrees, among other
things, to permit examination of the records by representatives or
designees of the Commission as well as to promptly furnish to the
Commission or its designee true, correct, complete, and current hard
copies of any or all or any part of such books and records. Further,
the Alternative Undertaking also refers to designees of the
Commission.\232\ Finally, under the final amendments, the provisions of
Rule 17a-4(f) setting forth the undertakings required of the Designated
Executive Officer or Designated Third Party also refer to designees of
the Commission.\233\
---------------------------------------------------------------------------

    \231\ See section II.G of this release (discussing the
Traditional Undertaking). See also paragraph (i)(1)(ii)(A) of Rule
17a-4, as amended (setting forth the Traditional Undertaking).
    \232\ See also paragraph (i)(1)(ii)(B) of Rule 17a-4, as amended
(setting forth the Alternative Undertaking).
    \233\ See paragraph (f)(3)(v)(A) of Rule 17a-4, as amended.
---------------------------------------------------------------------------

    The broker-dealer examining authorities are examiners of broker-
dealer compliance with the securities laws. Therefore, they play a
critical role in supporting the Commission's oversight of broker-
dealers. For these reasons, the broker-dealer examining authorities
should have the same level of access to a broker-dealer's records as is
afforded the Commission under Rules 17a-4(f) and 17a-4(i).
Consequently, the Commission is hereby designating a broker-dealer's
examining authorities as a Commission designee for the purposes of
Rules 17a-4(f) and 17a-4(i).

IV. Paperwork Reduction Act

    Certain provisions of the rule amendments being adopted in this
release contain a new ``collection of information'' within the meaning
of the Paperwork Reduction Act of 1995 (``PRA'').\234\ The Commission
submitted 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.\235\ The
Commission's earlier PRA assessments have been revised to reflect the
modifications to the rules and amendments from those that were
proposed, as well as additional information and data now available to
the Commission. 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.\236\ The titles and OMB
control numbers for the collections of information are:
---------------------------------------------------------------------------

    \234\ See 44 U.S.C. 3501 et seq.
    \235\ See 44 U.S.C. 3507; 5 CFR 1320.11.
    \236\ 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. 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.\237\ Rule 18a-6 sets forth record preservation requirements
applicable to SBS Entities that are not dually registered as broker-
dealers.\238\ The Commission is amending Rules 17a-4(f) \239\ and 18a-
6(e),\240\ 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.
---------------------------------------------------------------------------

    \237\ 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.
    \238\ 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.
    \239\ See Rule 17a-4(f) (setting forth the electronic record
preservation requirements for broker-dealers).
    \240\ See Rule 18a-6(e) (setting forth the electronic record
preservation requirements for SBS Entities).
---------------------------------------------------------------------------

    The amendments to Rule 17a-4(f) add an audit-trail alternative to
the existing WORM requirement.\241\ The amendments to Rule 18a-6(e) add
a requirement that electronic recordkeeping systems used by nonbank SBS
Entities, which currently do not have a WORM requirement, must comply
with either the audit-trail requirement or the WORM requirement.\242\
---------------------------------------------------------------------------

    \241\ See section II.D.2. of this release (discussing these
amendments in more detail).
    \242\ 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) 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)
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 provisions require broker-dealers and
SBS Entities to maintain a second copy of a record. The Commission
proposed to amend both of these paragraphs to require the broker-dealer
and the SBS Entity to maintain a backup set of records when records are
preserved on an electronic recordkeeping system. Under the proposed new
requirements, a broker-dealer or SBS Entity electing to use an
electronic recordkeeping system would have been required to employ a
second electronic recordkeeping system as a backup.
    In response to comments received, the Commission is replacing these
proposed requirements with a requirement that a broker-dealer or SBS
Entity electing to use an electronic recordkeeping system must either:
(1) include a backup electronic recordkeeping system that meets the
other requirements for electronic recordkeeping systems and that
retains the records required to be maintained and preserved pursuant to
Rules 17a-3 and 17a-4 (for broker-dealers) or Rules 18a-5 and 18a-6
(for SBS Entities) in accordance with the relevant rules in a manner
that will serve as a redundant set of records if the original
electronic recordkeeping system is temporarily or permanently
inaccessible; or (2) have other redundancy capabilities that are
designed to ensure access to the records required to be maintained and
preserved pursuant to Rules 17a-3 and 17a-4 (for broker-dealers) or
Rules 18a-5 and 18a-6 (for SBS Entities).\243\ The Commission is adding
the ``other redundancy capabilities'' alternative to the proposed
backup system requirement in response to comments that redundancy is a
broader concept than a back-up recordkeeping system and will therefore
give firms more flexibility than would a back-up recordkeeping system
requirement without the alternative.
---------------------------------------------------------------------------

    \243\ See section II.D.6. of this release (discussing these
amendments in more detail). Note that, as discussed above, the
proposed amendments were to paragraph (f)(3) of Rule 17a-4 and
paragraph (e)(3) of Rule 18a-6, while the amendments as adopted are
to paragraph (f)(2) of Rule 17a-4 and paragraph (e)(2) of Rule 18a-
6. Although the placement of the rule text as adopted does not apply
to bank SBS Entities (as opposed to the placement of the rule text
as proposed), this does not alter the applicable PRA burden
estimates for either rule.
---------------------------------------------------------------------------

    Rule 17a-4(f) also 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 examining authority 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
have eliminated the third-party access and undertakings requirements
and replaced them with a requirement that a senior officer of the
broker-dealer have the access and provide the necessary undertakings.
In addition, the proposed amendments to Rule 18a-6(e), which does not
have third-party access and undertakings requirements, would have added
senior officer access and undertakings requirements analogous to that
of Rule 17a-4(f) as proposed to be amended.
    The amendments as adopted differ in two ways from the amendments as
proposed.\244\ First, the Commission is adopting the proposed senior
officer access and undertakings requirements in both Rules 17a-4(f) and
18a-6(e); however, in response to comments, while the amendments as
adopted require that one senior officer at the executive level (the
Designated Executive Officer) execute the undertaking and bear the
responsibility for fulfilling the obligations under the undertaking,
they also allow the Designated Executive Officer to appoint in writing
up to two employees (the ``designated officers'') who report directly
or indirectly to the executive officer to act on behalf of the
executive officer if the executive officer is not available to take the
steps necessary to meet the executive officer's obligations under the
undertaking. In addition, the Designated Executive Officer may appoint
in writing up to three professionals (``designated specialists'') over
whom the Designated Executive Officer and the designated officers have
authority to take the steps necessary to access the records. Second, in
response to comments, the Commission is retaining the existing third-
party access and undertakings option as an alternative in Rule 17a-4(f)
and adding the option of third-party access and undertakings to Rule
18a-6(e) as an alternative to the new Designated Executive Officer
access and undertakings requirement of that rule, as amended. As such,
under the amendments as adopted, the access and undertakings
requirements of both Rules 17a-4(f) and 18a-6(e) may be fulfilled

by either a Designated Executive Officer or a Designated Third Party.
---------------------------------------------------------------------------

    \244\ See section II.E.6. of this release (discussing these
modifications in more detail).
---------------------------------------------------------------------------

    The Commission is amending Rule 18a-6 to remove, for bank SBS
Entities, the requirements for electronic recordkeeping systems set
forth in paragraph (e)(2) of Rule 18a-6.\245\ However, the other
provisions of paragraph (e) of Rule 18a-6, as amended, continue to
apply to all SBS Entities.
---------------------------------------------------------------------------

    \245\ See section II.D.1. of this release (discussing these
amendments in more detail).
---------------------------------------------------------------------------

    The Commission is amending Rule 17a-4(f) to move the requirements
for broker-dealers using micrographic media to new paragraph
(f)(4).\246\ Rule 18a-6(e) does not provide for retaining records using
micrographic media.
---------------------------------------------------------------------------

    \246\ See section II.F. of this release (discussing these
amendments in more detail).
---------------------------------------------------------------------------

    The amendments to Rule 17a-4(f) eliminate a requirement that the
broker-dealer notify its DEA before employing an electronic
recordkeeping system.\247\ Rule 18a-6(e) does not have a similar DEA
notification requirement.
---------------------------------------------------------------------------

    \247\ See section II.C. of this release (discussing these
amendments in more detail).
---------------------------------------------------------------------------

2. Amendments to Rules 17a-4(i) and 18a-6(f)
    Rules 17a-4(i) and 18a-6(f) require a third party who prepares or
maintains the regulatory records of a broker-dealer or SBS Entity
(regardless of whether the records are in paper or electronic form) to
file a written undertaking with the Commission signed by a duly
authorized person. The undertaking must include a provision whereby the
third-party agrees, among other things, to permit examination of the
records by representatives or designees of the Commission as well as to
promptly furnish to the Commission or its designee true, correct,
complete, and current hard copies of any or all or any part of such
books and records. Some broker-dealers and SBS Entities maintain their
electronic recordkeeping systems and associated electronic records on
servers or other storage devices that are owned or operated by a third
party (e.g., a cloud service provider). The broker-dealer or SBS Entity
controls the electronic recordkeeping system and the access to the
electronic records preserved on the system. Consequently, the third
parties state that they cannot provide the undertaking required under
Rules 17a-4 and 18a-6.
    The Commission is amending the Rules 17a-4(i) and 18a-6(f) to
address this development in electronic recordkeeping practices.\248\
Under the amendments, the third party may provide an alternative
undertaking (i.e., the Alternative Undertaking) that is tailored to how
cloud service providers hold electronic records for broker-dealers and
SBS Entities. The use of the Alternative Undertaking is subject to
certain conditions, including that the records are maintained on an
electronic recordkeeping system and the broker-dealer or SBS Entity has
independent access to the records meaning, among other things, the
broker-dealer can access the records without the need of any
intervention of the third party. Consequently, the Alternative
Undertaking cannot be used if the records maintained and preserved by
the third party are not maintained and preserved by means of an
electronic recordkeeping system (e.g., it cannot be used if the records
are in paper form). It also cannot be used if the broker-dealer or SBS
Entity must rely on the third party to take an intervening step to make
the records available to the broker-dealer or SBS Entity (e.g., it
cannot be used if the broker-dealer or SBS Entity must ask the third
party to transfer copies of the records to the broker-dealer or SBS
Entity or must ask the third party to first decrypt the records before
they can be accessed).
---------------------------------------------------------------------------

    \248\ See section II.G. of this release (discussing these
amendments in more detail).
---------------------------------------------------------------------------

    In the Alternative Undertaking, the third party must, among other
things, acknowledge that the records are the property of the broker-
dealer or SBS Entity and that the broker-dealer or SBS Entity has
represented to the third party that the broker-dealer or SBS Entity:
(1) is subject to rules of the Commission governing the maintenance and
preservation of certain records; (2) has independent access to the
records maintained by the third party; and (3) consents to the third
party fulfilling the obligations set forth in the undertaking. Further,
the third party must undertake to facilitate within its ability, and
not impede or prevent, the examination, access, download, or transfer
of the records by a representative or designee of the Commission as
permitted under the law. In the case of a broker-dealer, the third
party must also undertake to facilitate within its ability, and not
impede or prevent, a trustee appointed under SIPA to liquidate the
broker-dealer in accessing, downloading, or transferring the records as
permitted under the law.
3. 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. 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.
    The Commission is amending the prompt production of records
requirements of Rules 17a-4(j) and 18a-6(g).\249\ The amendments to
Rules 17a-4(j) and 18a-6(g) 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.
---------------------------------------------------------------------------

    \249\ See section II.H. of this release (discussing these
amendments in more detail).
---------------------------------------------------------------------------

    The Commission did not receive any comments specifically pertaining
to the PRA estimates set forth in the proposing release.

B. Proposed Use of Information

    The requirements of Rules 17a-4(f) and 18a-6(e), including the
amendments to these rules being adopted in this document, 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.\250\ The
amendments to Rules 17a-4(j) and (i) and 18a-6(g) and (f) are designed
to facilitate examinations and other regulatory reviews by making
records accessible and examinations more efficient. Taken as a whole,
the collections of information under the amendments to Rules 17a-4(f),
(i), and (j) and 18a-6(e), (g), and (f) are designed to promote the
prudent operation of broker-dealers and SBS Entities and facilitate the
examinations of broker-dealers and SBS Entities by the Commission and
other relevant securities regulators (e.g., SROs and state securities
regulators).
---------------------------------------------------------------------------

    \250\ 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, 2021, there were 3,508 broker-dealers registered
with the Commission.\251\ As of July 31, 2022, 48 SBSDs have registered
with the Commission, while no MSBSPs have registered with the
Commission.\252\ Six of the SBSDs are existing broker-dealers and,
therefore, are included in the 3,508 broker-dealers. Twenty-one of the
SBSDs are applying substituted compliance with respect to the
requirements of Rule 18a-6.\253\ Two SBSDs are using the alternative
compliance mechanism of 17 CFR 240.18a-10 (Exchange Act Rule 18a-10)
and, therefore, complying with the CFTC's recordkeeping rules.\254\
This leaves nineteen SBSDs that are subject to Rule 18a-6 and,
therefore, will be subject to the amendments to that rule. Seventeen of
these SBSDs have a prudential regulator and also are registered with
the CFTC as swap dealers. Because these seventeen SBSDs have a
prudential regulator, they will not be subject to paragraph (e)(2) of
Rule 18a-6. This leaves two SBSDs that will be subject to paragraph
(e)(2) of Rule 18a-6. These SBSDs are not dually registered with the
CFTC.
---------------------------------------------------------------------------

    \251\ This estimate is derived from broker-dealer FOCUS filings
as of December 31, 2021, as described in greater detail in the
economic baseline, and is inclusive of seven OTC derivatives dealers
affected by the final amendments.
    \252\ 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.
    \253\ See Substituted Compliance Notices, available at: https://www.sec.gov/tm/Substituted-compliance-Notices.
    \254\ See 17 CFR 240.18a-10.
---------------------------------------------------------------------------

    The following table summarizes the estimated number of broker-
dealers (respondents) that will be subject to the amendments to Rule
17a-4 and the number of SBSDs (respondents) that will be subject to the
amendments to Rule 18a-6 and those that will be specifically subject to
paragraph (e)(2) of Rule 18a-6 (i.e., non-bank SBSDs).

------------------------------------------------------------------------
                     Type of registrant                         Number
------------------------------------------------------------------------
Broker-dealers (including SBSDs dually registered as broker-       3,508
 dealers)...................................................
SBSDs that will be subject to Rule 18a-6, as amended........          19
SBSDs that will be subject to Rule 18a-6(e)(2), as amended..           2
------------------------------------------------------------------------

    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.,
3,333 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 amended. The
Commission believes that all SBSDs that are subject to Rule 18a-6(e)
(i.e., 19 SBSDs) use electronic recordkeeping systems pursuant to the
requirements of Rule 18a-6(e) and will continue to do so under the
amendments.
    Finally, based on staff experience, the Commission estimates that
500 of the broker-dealers and 10 of the SBSDs currently employ cloud
service providers for electronic recordkeeping purposes and will be
required to obtain the Alternative Undertaking from a cloud service
provider (i.e., an undertaking tailored to how cloud service providers
hold electronic records for broker-dealers and SBSDs) discussed above.
Further, based on staff experience and discussions with the industry,
the Commission estimates that the five different cloud service
providers currently used by broker-dealers for electronic recordkeeping
purposes will need to execute these 510 Alternative Undertakings and
that each has approximately an equal number of broker-dealer and SBSD
clients. Therefore, the Commission estimates that each cloud service
provider will need to execute 102 Alternative Undertakings.

D. Total Initial and Annual Reporting Burdens

1. 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 amendments to these rules will both
add to and decrease the current time burden estimates as explained
below.
    The amendments to Rule 17a-4(f) 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.\255\ Consequently, broker-dealers may continue to meet the
requirements of the rule by using any WORM-compliant electronic
recordkeeping system they employ today. The amendments to Rule 18a-6(e)
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.\256\
---------------------------------------------------------------------------

    \255\ See section II.D.2. of this release (discussing these
amendments in more detail).
    \256\ 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 amended, either because they currently use
an electronic recordkeeping system that meets the WORM requirement or
because they currently use one that can meet the proposed audit-trail
requirement. Indeed, the Commission believes that some broker-dealers
are currently 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 will
incur initial costs to build an electronic recordkeeping system that
meets either the WORM requirement or the audit-trail requirement or
will 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 will 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 subject to
the requirements of paragraph (e)(2) of Rule 18a-6 will have an initial
burden either to build an electronic recordkeeping system that meets
either the WORM requirement or the audit-trail requirement or to hire a
vendor to provide the service. Similarly, on an ongoing basis, the
broker-dealer or SBSD will be required to expend financial or human
resources to maintain their recordkeeping systems to comply with the
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 or SBS Entity is $10 million, with an additional cost of
$1.2 million annually to maintain the system.\257\ 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 will be substantially lower than the

analogous costs that would be incurred with respect to a WORM-compliant
system.\258\ 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.
---------------------------------------------------------------------------

    \257\ See Rule 17a-4(f) Rulemaking Petition Addendum at 4-5.
    \258\ See e.g. Rule 17a-4(f) Rulemaking Petition at 6-7.
---------------------------------------------------------------------------

    As of December 31, 2021, there were 854 broker-dealers with assets
equal to or exceeding $10 million and two SBSDs that will 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 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 will elect to modernize their recordkeeping process
by building 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 2,654 broker-dealers
with less than $10,000,000 in total assets to build and maintain an
electronic recordkeeping system that meets the proposed audit-trail
requirement will be significantly less than the $1,000,000 initial and
$120,000 annual costs estimated for the 854 larger broker-dealers and
the two SBSDs that will 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 2,654 broker-dealers with less
than $10,000,000 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 will 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 will incur an
initial burden and ongoing annual burden in order to meet the
requirement that a broker-dealer or SBS Entity electing to use an
electronic recordkeeping system either: (1) include a backup electronic
recordkeeping system that meets the other requirements for electronic
recordkeeping systems and that retains the records required to be
maintained and preserved pursuant to Rules 17a-3 and 17a-4 (for broker-
dealers) or Rules 18a-5 and 18a-6 (for SBS Entities) in accordance with
the relevant rules in a manner that will serve as a redundant set of
records if the original electronic recordkeeping system is temporarily
or permanently inaccessible; or (2) have other redundancy capabilities
that are designed to ensure access to the records required to be
maintained and preserved pursuant to Rules 17a-3 and 17a-4 (for broker-
dealers) or Rules 18a-5 and 18a-6 (for SBS Entities).\259\ This
requirement could be fulfilled by a backup electronic recordkeeping
system (as proposed), and the Commission believes these burdens and
costs will 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 may be used for both systems. In addition, the Commission
believes that some broker-dealers or SBS Entities electing to use an
electronic recordkeeping system would employ a different means of
ensuring they meet the redundancy requirement than building a backup
system. The Commission estimates that the costs and burdens for the 854
larger broker-dealers and the two SBSDs that are subject to paragraph
(e)(2) of Rule 18a-6 will 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 Commission believes that initial
and annual costs will 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 will be $5,000,000 in
initial costs and burdens and $600,000 in annual costs and burdens.
---------------------------------------------------------------------------

    \259\ See section II.D.6. of this release (discussing these
amendments in more detail).
---------------------------------------------------------------------------

    The Commission estimates that the costs and burdens incurred by the
80 smaller broker-dealers that will build electronic recordkeeping
systems to meet the audit-trail requirement and, therefore, will need
to ensure that they meet the backup system or redundancy requirement,
will be substantially less than the costs and burdens incurred by the
larger broker-dealers. The Commission estimates that these firms will
incur 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 will be $2,000,000 in
initial costs and burdens and $240,000 in ongoing annual costs and
burdens.
    The amendments to Rule 17a-4(f) replace the third-party access and
undertakings requirement with a requirement to either continue to use a
Designated Third Party for the access and undertakings requirement or
instead name a Designated Executive Officer of the broker-dealer with
the necessary authority and access to provide the necessary
undertakings.\260\ Based on the Commission's most recent information
submitted to the OMB in connection with the renewal of Rule 17a-4, for
broker-dealers that elect the latter option, this will 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 amendments to the rule add a requirement that
either a Designated Third Party or a Designated Executive Officer
complete the access and undertakings requirements in a manner analogous
to the requirements of Rule 17a-4(f), as amended.\261\ The change in
the format of the undertakings will require all broker-dealers to
obtain new undertakings regardless of whether

they elect to replace their Designated Third Party with a Designated
Executive Officer. Therefore, the Commission estimates that this change
and, in the case of SBSDs, the addition of a Designated Executive
Officer or Designated Third Party undertakings requirement, will result
in a one-time initial burden of one hour per firm, for a total of 3,333
hours for an initial cost of $1,656,501 under Rule 17a-4(f) and 19
hours for an initial cost of $9,443 for SBSDs under Rule 18a-6(e).\262\
The Commission also believes that the Designated Third Party or
Designated Executive Officer undertakings requirement will add an
annual burden of one hour per firm, for a total of 3,333 hours for
broker-dealers collectively,\263\ resulting in a total ongoing cost of
$1,656,501, and 19 hours for a total ongoing cost of $9,443 for SBSDs
collectively.\264\
---------------------------------------------------------------------------

    \260\ Throughout this section IV, 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.
    \261\ As noted above, paragraph (f) of Rule 18a-6 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.
    \262\ One-time initial cost for broker-dealers: 3,333 hours x
$497 per hour (at the controller hourly rate) = $1,656,501. One time
initial cost for SBSDs: 19 hours x $497 per hour (at the controller
hourly rate) = $9,443.
    \263\ The Commission believes that while the existing third-
party requirement is an external burden, the senior officer
requirement would be an internal burden required to be accounted for
in this section.
    \264\ Ongoing cost for broker-dealers: 3,333 hours x $497 per
hour (at the controller hourly rate) = $1,656,501. Ongoing cost for
SBSDs: 19 hours x $497 per hour (at the controller hourly rate) =
$9,443. As discussed above, each affected entity that names a
Designated Executive Officer to make undertakings instead of a third
party may experience a cost savings of less than $5,000 from not
having to incur the payment to a third party agreeing to perform
this service.
---------------------------------------------------------------------------

    The amendments move existing requirements for broker-dealers using
micrographic media from paragraph (f)(3)(i) of Rule 17a-4 to new
paragraph (f)(4) of Rule 17a-4, but do not change the substantive
requirements. The amendments do not propose a micrographic media
alternative for SBS Entities for the reasons described above. The
Commission does not believe the amendments relating to micrographic
media will have any impact on the burden experienced by broker-dealers
or SBS Entities.
    The Commission anticipates that eliminating the application of
paragraph (e)(2) of Rule 18a-6 to the 17 SBSDs that have a prudential
regulator and are subject to Rule 18a-6 will result in a decrease of
100 hours per firm on an annual basis, or 1,700 hours per year for all
firms affected by the amendment, for an ongoing cost savings of
$537,000 per year for all affected firms.\265\
---------------------------------------------------------------------------

    \265\ 1,700 hours x $316 per hour (at the compliance manager
rate) = $537,000.
---------------------------------------------------------------------------

    Finally, based upon information provided to the Commission from
FINRA staff, the Commission believes that the elimination of the DEA
notification requirement will 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 \266\ per year for the industry.
---------------------------------------------------------------------------

    \266\ 433 hours x $316 per hour (at the compliance manager rate)
= $136,828.
---------------------------------------------------------------------------

2. Amendments to Rules 17a-4(j) and 18a-6(g)
    The amendments to Rules 17a-4(j) and 18a-6(g) 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. The Commission does not believe that these amendments will
change the initial or annual hourly burden for broker-dealers or SBS
Entities.
3. Amendments to Rules 17a-4(i) and 18a-6(f)
    The amendments to Rules 17a-4(i) and 18a-6(f) require broker-
dealers and SBS Entities that use cloud service providers to draft and
obtain an executed the Alternative Undertaking. The Commission believes
that 500 of the broker-dealers and 10 of the SBSDs will be required to
obtain the alternative undertaking from cloud service providers and
that this will result in a one-time initial burden of one hour per
dealer, for a total of 510 hours and an initial cost of $253,470.\267\
In addition, the Commission estimates that the need for the five cloud
service providers to review and execute the Alternative Undertaking
will result in a one-time initial burden of 102 hours per provider, for
a total of 510 hours and an initial cost of $253,470.\268\
---------------------------------------------------------------------------

    \267\ One-time initial cost for broker-dealers and SBSDs: 510
hours x $497 per hour (at the controller hourly rate) = $253,470.
    \268\ One-time initial cost for five cloud service providers:
(102 hours x five cloud service providers) x $497 per hour (at the
controller hourly rate) = $253,470.
---------------------------------------------------------------------------

    The estimated hourly burdens and estimated costs associated with
the final amendments to Rules 17a-4 and 18a-6 are summarized in the
following tables:

                                                                Summary of Hourly Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Initial hourly  Ongoing hourly  Initial hourly   Annual hourly
      Name of information collection               Type of burden            Number of      burden per      burden per    burden for all  burden for all
                                                                            respondents     respondent      respondent      respondents     respondents
--------------------------------------------------------------------------------------------------------------------------------------------------------
Third party or Designated Executive         Recordkeeping...............           3,333               1               1           3,333           3,333
 Officer Undertaking-BDs.
Third party or Designated Executive         Recordkeeping...............              19               1               1              19              19
 Officer Undertaking-SBSDs.
Elimination of electronic recordkeeping     Recordkeeping...............              17           (100)           (100)         (1,700)         (1,700)
 requirements for bank SBSDs.
Elimination of the DEA notification         Recordkeeping...............             433             (1)             (1)           (433)           (433)
 requirement for BDs.
Alternative undertaking--BDs and SBSDs....  Recordkeeping...............             510               1               0             510               0
Alternative undertaking--Cloud Service      Recordkeeping...............               5             102               0             510               0
 Providers.
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                                                 Summary of Cost Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Initial cost     Annual cost
      Name of information collection               Type of burden            Number of     Initial cost    Ongoing cost       for all         for all
                                                                            respondents   per respondent  per respondent    respondents     respondents
--------------------------------------------------------------------------------------------------------------------------------------------------------
Large BD and SBS Entity cost to build and   Recordkeeping...............              20      $1,000,000        $120,000     $20,000,000      $2,400,000
 implement audit trail alternative system.
Small BD cost to build and implement audit  Recordkeeping...............              80         100,000          12,000       8,000,000         960,000
 trail alternative system.
Large BD and SBS Entity cost to build and   Recordkeeping...............              20         250,000          30,000       5,000,000         600,000
 implement redundant recordkeeping system.
Small BD cost to build and implement        Recordkeeping...............              80          25,000           3,000       2,000,000         240,000
 redundant recordkeeping system.
Third party or Designated Executive         Recordkeeping...............           3,333             497             497       1,656,501       1,656,501
 Officer Undertaking--BDs.
Third party or Designated Executive         Recordkeeping...............              19             497             497           9,443           9,433
 Officer Undertaking--SBSDs.
Elimination of electronic recordkeeping     Recordkeeping...............              17       ($31,600)       ($31,600)      ($537,000)      ($537,000)
 requirements for bank SBSDs.
Elimination of the DEA notification         Recordkeeping...............             433          ($316)          ($316)      ($136,828)      ($136,828)
 requirement for BDs.
Alternative undertaking required--BDs and   Recordkeeping...............             510             497               0         253,470               0
 SBSDs.
Alternative undertaking required--cloud     Recordkeeping...............               5          50,694               0         253,470               0
 service providers.
--------------------------------------------------------------------------------------------------------------------------------------------------------

E. Collection of Information is Mandatory

    The collections of information pursuant to the 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
Rule 17a-4 or 18a-6 can request confidential treatment of the
information.\269\ If such confidential treatment request is made, the
Commission anticipates that it will keep the information confidential
subject to applicable law.\270\
---------------------------------------------------------------------------

    \269\ 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.
    \270\ 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 amended, specifies the required retention periods
for records required to be made and preserved by a broker-dealer,
whether electronically or otherwise.\271\ Rule 18a-6, as amended,
specifies the required retention periods for records required to be
made and preserved by an SBS Entity, whether electronically or
otherwise.\272\ Many of the required records must be retained for three
years; certain other records must be retained for longer periods.\273\
---------------------------------------------------------------------------

    \271\ See Rule 17a-4, as amended.
    \272\ See Rule 18a-6, as amended.
    \273\ See Rules 17a-4 and 18a-6, as amended.
---------------------------------------------------------------------------

V. Economic Analysis

    The Commission is mindful of the economic effects, including the
costs and benefits, of the final amendments. Section 3(f) of the
Exchange Act provides that whenever the Commission is engaged in
rulemaking pursuant to the Exchange Act and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, the Commission shall also consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation.\274\ In addition, Section 23(a)(2)
of the Exchange Act requires the Commission, when making rules under
the Exchange Act, to consider the impact such rules would have on
competition.\275\ Exchange Act Section 23(a)(2) also provides that the
Commission shall not adopt any rule which would impose a burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Exchange Act.
---------------------------------------------------------------------------

    \274\ See 15 U.S.C. 78c(f).
    \275\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The analysis below addresses the likely economic effects of the
final amendments, including the anticipated and estimated benefits and
costs of the amendments and their likely effects on efficiency,
competition, and capital formation. The Commission also discusses the
potential economic effects of certain alternatives. Many of the
benefits and costs discussed below are difficult to quantify. For
example, the Commission cannot quantify the extent to which some
broker-dealers and SBS Entities may need to upgrade existing electronic
recordkeeping systems to meet the audit-trail requirement or the degree
to which broker-dealers and SBS Entities may currently pass along
recordkeeping costs to customers and counterparties. While the
Commission has attempted to quantify economic effects where possible,
much of the

discussion of economic effects is qualitative in nature.

A. Baseline

    To assess the economic effects of the amendments, the Commission is
using as the baseline the broker-dealer and security-based swap markets
as they exist at the time of this release, including applicable rules
the Commission has already adopted, but excluding rules the Commission
has proposed but not yet finalized.
    With respect to broker-dealers, the regulatory baseline includes
Rule 17a-4(f), (i), and (j). In addition, as discussed above, the
Commission has also issued interpretations of Rule 17a-4(f) for broker-
dealers.\276\ With respect to SBS Entities, the regulatory baseline
includes the statutory provisions pursuant to the Dodd-Frank Act and
rules adopted by the Commission, compliance with which is required.
This includes rules adopted by the Commission in the following adopting
releases: the intermediary definitions release; \277\ cross-border
release; \278\ security-based swap entity registration release; \279\
U.S. activity release; \280\ business conduct release; \281\ trade
acknowledgment release; \282\ capital, margin, and segregation release;
\283\ and the recordkeeping and reporting release adopting Rule 18a-
6(e), (f), and (g).\284\
---------------------------------------------------------------------------

    \276\ See Section II.D discussing Rule 17a-4(f) Interpretation.
See SBSD/MSBSP Recordkeeping Adopting Release, 84 FR at 68568. As
discussed in Section II.D.2, the Commission confirms that a broker-
dealer or nonbank SBS Entity may rely on those interpretations with
respect to meeting the WORM requirement of Rule 17a-4(f) or 18a-
6(e), as amended.
    \277\ See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,''
Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23,
2012).
    \278\ See Application of ``Security-Based Swap Dealer'' and
``Major Security-Based Swap Participant'' Definitions to Cross-
Border Security-Based Swap Activities, Exchange Act Release No.
72372 (June 25, 2014, 79 FR 47278, 47359 (Aug. 12, 2014).
    \279\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, Exchange Act Release No.
75611 (Aug. 5, 2015), 80 FR 48964, 48989 (Aug. 14, 2015).
    \280\ See Security-Based Swap Transactions Connected With a Non-
U.S. Person's Dealing Activity That Are Arranged, Negotiated, or
Executed by Personnel Located in a U.S. Branch or Office of an
Agent; Security-Based Swap Dealer De Minimis Exception, Exchange Act
Release No. 77104 (Feb. 10, 2016), 81 FR 8598 (Feb. 19, 2016).
    \281\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, Exchange Act
Release No. 77617 (Apr. 14, 2016), 81 FR 29960, 30081 (May 13,
2019).
    \282\ See Trade Acknowledgment and Verification of Security-
Based Swap Transactions, Exchange Act Release No. 78011 (Jun. 8,
2016), 81 FR 39808, 30143-44 (Jun. 17, 2016).
    \283\ See SBSD/MSBSP Capital, Margin, and Segregation Adopting
Release, 84 FR 43872.
    \284\ See SBSD/MSBSP Recordkeeping Proposing Release, 84 FR
68550.
---------------------------------------------------------------------------

    The following sections discuss available data about the security-
based swap market, affected SBS Entities, dual registrants, other
security-based swap market participants, participant domiciles, and
broker dealer activity.
1. Broker-Dealers
    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. 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.\285\ Some broker-dealers may specialize in just
one narrowly defined service, while others may provide a wide variety
of services.
---------------------------------------------------------------------------

    \285\ See Regulation Best Interest: The Broker-Dealer Standard
of Conduct, Exchange Act Release No. 86031 (June 5, 2019), 84 FR
33318, 33406 (July 12, 2019). For simplifcation, 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 2021, there
were approximately 3,508 registered broker-dealers with over 240
million customer accounts.\286\ In total, these broker-dealers have
over $5 trillion in total assets as reported on Form X-17A-5.\287\ More
than two-thirds of all broker-dealer assets and just under one-third of
all customer accounts are held by the 21 largest broker-dealers, as
shown in Table 1.\288\
---------------------------------------------------------------------------

    \286\ The data is obtained from FOCUS filings as of December
2021. 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.
    \287\ 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.
    \288\ Approximately $5.26 trillion of total assets of broker-
dealers (98.6%) are at broker-dealers with total assets in excess of
$1 billion.

                             Table 1--Registered Broker-Dealers as of December 2021
----------------------------------------------------------------------------------------------------------------
                                                                                Aggregate
                                                                   Total number      Aggregate       number of
              Size of broker-dealer (total assets)                    of BDs       total assets      customer
                                                                                ($ bln)        accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................................              21           3,682      75,808,084
$1 billion to $50 billion.......................................             124           1,581     153,243,391
$500 million to $1 billion......................................              30              22         518,545
$100 million to $500 million....................................             147              31       9,559,082
$10 million to $100 million.....................................             532              19         128,669
$1 million to $10 million.......................................           1,065               4         885,269
<$1 million.....................................................           1,589             0.5          10,854
                                                                 -----------------------------------------------
    Total.......................................................           3,508           5,338     240,153,894
----------------------------------------------------------------------------------------------------------------

    The Commission estimates that 40 broker-dealers may be dually
registered with the CFTC as futures commission merchants as of December
31, 2021.\289\ In addition to the above estimates of affected broker-
dealers, which covers broker-dealers that are members of SROs, over-
the-counter (``OTC'') derivatives dealers will also be affected by the
recordkeeping amendments. The Commission estimates that seven
registered OTC derivatives dealers will be impacted by the amendments
to Rule 17a-4.
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    \289\ Using FOCUS Report data as of December 31, 2021, there are
40 broker-dealers that report commodity futures account activity in
``Part II: Customer's Regulated Commodity Futures Accounts.''
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2. Security-Based Swap Entities
    Final SBS Entity registration rules have been adopted and
compliance was required as of November 1, 2021.\290\ As of April 30,
2022, there are 48 entities registered with the Commission as SBSDs,
and no entities have registered as MSBSPs.\291\
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    \290\ 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.
    \291\ See section V.C. of this release (discussing the number of
SBS Entities that would be subject to the final rules). See also
Proposing Release, 86 FR at 68315-16 for additional information
regarding the security-based swap market.
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    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. In part, this reflects the
relationship between single-name credit default swap (``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,\292\
creating hedging opportunities across these markets.
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    \292\ ``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).
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    These hedging opportunities mean that participants that are active
in one market are likely to be active in the other. Of the 19 SBSDs
subject to Rule 18a-6(e), 17 have a prudential regulator and are dually
registered with the CFTC as swap dealers.\293\ Because these 17 SBSDs
have a prudential regulator, they are not subject to paragraph (e)(2)
of Rule 18a-6, which sets forth the technical requirements for
electronic recordkeeping systems (including the WORM and audit trail
requirements). Thus, only two SBSDs will be subject to the WORM or
audit trail requirement and these SBSDs are not also registered with
the CFTC.
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    \293\ 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
final rules).
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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,\294\ 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.
However, as discussed in Section IV, 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
amended, either because they currently use an electronic recordkeeping
system that meets the WORM requirement or because they currently use
one that can meet the proposed audit-trail requirement. Indeed, some
broker-dealers may currently be 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).
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    \294\ See sections I.B.1. and II.D. of this release (discussing
the interpretations and broker-dealers' response to them).
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    As discussed in Section II.I, the Commission understands that
broker-dealers themselves may need to have access to--and the ability
to read--their own records retained by means of an electronic
recordkeeping system. Thus, most, if not all, broker-dealer electronic
records are produced in a human readable and reasonably usable
electronic format.
    The Commission understands that third-party vendors developed
software-based solutions designed to meet the WORM requirement of Rule
17a-4(f).\295\ 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 Section II.D.2 above, the Commission 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.\296\ 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.\297\
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    \295\ See, e.g., 17a-4, LLC Letter; NCC Group Letter; RegEd
Letter.
    \296\ See section II.D of this release (discussing broker-
dealers' use of WORM compliant electronic recordkeeping systems).
    \297\ 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.
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    The Commission understands that, as discussed above, some broker-
dealers and SBS Entities maintain their electronic recordkeeping
systems and associated electronic records on servers or other storage
devices that are owned or operated by third parties (e.g., cloud

service providers), while the broker-dealer or SBS Entity retains
control of the electronic recordkeeping system and access to the
electronic records preserved on the system. The Commission understands
that such arrangements are commonly governed by contractual agreements
between broker-dealers or SBS Entities and their cloud service
providers. Under Rules 17a-4 and 18a-6, third parties who prepare or
maintain the regulatory records of a broker-dealer or SBS Entity are
required to file a written undertaking with the Commission. The
undertaking must include a provision whereby the third party agrees,
among other things, to permit examination of the records by
representatives or designees of the Commission as well as to promptly
furnish to the Commission or its designee true, correct, complete, and
current hard copies of any or all or any part of such books and
records.
    Finally, as discussed in Section V.A.2 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 Amendments

    The amendments are intended to modernize the SBS Entity and broker-
dealer recordkeeping rules given technological changes over the last
two decades and the Commission has received a number of comments in
support of the benefits of these amendments.\298\ The Commission
continues to believe that by specifying that nonbank SBS Entities \299\
and broker-dealers may satisfy their electronic recordkeeping
obligations through the WORM requirement or an audit-trail alternative,
the 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 amendments.\300\
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    \298\ See, e.g., NCC Group Letter, LPL Financial Letter,
American Fund Distributors Letter.
    \299\ With respect to SBS Entities, the final amendments 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, 17 of 19 SBS
Entities subject to Rule 18a-6 have a prudential regulator (i.e.,
are bank SBS Entities). The exclusion of bank SBS Entities from the
scope of the electronic recordkeeping system requirements would
reduce aggregate benefits and costs related to modifying electronic
recordkeeping systems to conform to the amendment to paragraph
(e)(2) of Rule 18a-6.
    \300\ See section V.D. of this release (discussing increases and
decreases in costs and burdens relating to the amendments for
purposes of the Paperwork Reduction Act).
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    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 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 amendments. Third, because
the amendments 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 amendments 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 amendments may also enhance Commission oversight of broker-
dealers and nonbank SBS Entities. To the degree that the amendments 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 believes
that the 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 believes that some of the amendments may provide
compliance efficiencies. For example, the 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. Further, the Commission 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.\301\
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    \301\ See section V.D. of this release (discussing increases and
decreases in costs and burdens relating to amendments for purposes
of the Paperwork Reduction Act).
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    The proposing release would have eliminated the third-party access
and undertakings requirements and would have replaced them with a
senior officer undertakings requirement. In the proposing release, the
Commission indicated that the removal of the third party undertaking
was expected to benefit affected entities by reducing cybersecurity and
trade-secret risks attendant to requiring a third party to fulfill
these responsibilities.\302\ The Commission also expected that senior

officer undertakings could enhance the efficiency of Commission
examinations and oversight.
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    \302\ See Proposing Release, 86 FR at 68317.
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    However, some commenters stated that the third party undertakings
requirement facilitates regulatory access to records and creates
incentives for full cooperation from broker-dealers by providing an
alternative and independent means to access records.\303\ Another
commenter indicated that the third party undertakings requirement
benefits affected entities by resulting in meetings between compliance
and IT teams that improve broker-dealer understanding of how electronic
records are retained, accessed, and disposed of, among others.\304\ The
Commission has also received comment recommending that the Commission
preserve a third party undertaking as an option for affected entities
in the event a third party is maintaining records on behalf of the
firm.\305\ Moreover, other commenters pointed to benefits of allowing
more than one senior officer to complete the undertakings \306\ and of
allowing designation or delegation of responsibility.\307\
Specifically, commenters pointed to the need to provide flexibility
around personnel relocations, vacation scheduling, succession planning,
and technical expertise residing in personnel other than senior
officers.\308\
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    \303\ See NCC Group Letter.
    \304\ See 17a-4, LLC Letter.
    \305\ See RegEd Letter.
    \306\ See Fidelity Letter; NRS Letter; RegEd Letter; SIFMA
Letter.
    \307\ See American Funds Distributors Letter; ICE Bonds Letter;
SIFMA Letter.
    \308\ See American Funds Distributors Letter; SIFMA Letter.
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    As discussed in Section II.E.6, the final amendments would allow
affected entities to produce third party undertakings as an alternative
to the senior officer undertakings, and would allow the designated
executive officer to appoint in writing up to two employees and three
specialists to assist in fulfilling the officer's obligations. This
aspect of the final amendments may provide beneficial flexibility to
affected entities in organizing their compliance, and may facilitate
reliable and efficient Commission access to relevant records,
particularly for affected entities that are members of large and
complex financial groups.\309\
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    \309\ As discussed in Part II.G., under existing Rules 17a-4
introductory text and (i) and 18a-6(f), a contract with a third-
party record provider may not permit the provider to withhold,
delete, discard, or prevent remote access to an affected entity's
records in the event of a payment dispute or other contractual
dispute. Since these requirements are already part of the regulatory
baseline for third-party record providers subject to the new
provisions for alternative undertakings (such as cloud service
providers), the rule change is not expected to add new burdens. In
addition, to the degree that nonpayment or other contractual
disputes between third-party record providers and their clients can
hinder Commission access to records, the designated executive
undertaking provision may further enhance Commission access to
records of affected entities.
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    Moreover, as described in Section II.G, the final amendments would
allow affected broker-dealers and security-based swap dealers to have
certain third parties execute an Alternative Undertaking in lieu of the
Traditional Undertaking, under certain conditions. The Commission
believes that this aspect of the final amendments may better account
for how cloud service providers maintain records for broker-dealers and
SBS Entities. Thus, this aspect of the final amendments may enable
broker-dealers and SBS Entities to continue to rely on cloud service
provider services in the regular course of business and regulatory
recordkeeping. Moreover, the Commission believes that this aspect of
the final amendments may promote access of electronic records by the
Commission and other securities regulators, as well as trustees
appointed under SIPA, for broker-dealers and SBS Entities that maintain
records with cloud service providers. Overall, the Commission expects
that the final amendments may enhance Commission oversight and
examinations of broker-dealers and SBS Entities.
    Other final amendments may also incrementally improve regulatory
oversight or reduce cybersecurity risk. For example, 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. In addition, the elimination of the escrow account
option may reduce cybersecurity risk attendant to having this
information held by a third party in escrow.\310\
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    \310\ The Commission does not expect significant benefits or
costs associated with certain other amendments 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 paragraph
(f)(3)(i) of Rule 17a-4 and paragraph (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.
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C. Costs of the Amendments

    The amendments are intended to modernize the Commission's
recordkeeping requirements and to reduce recordkeeping duplication by