Amendments to Rule 17a-4 Electronic Recordkeeping Requirement

The U.S. Securities and Exchange Commission (SEC) adopted amendments to Exchange Act Rule 17a-4 in October 2022 with respect to the electronic recordkeeping requirements for broker-dealers, security-based swap dealers, and major security-based swap participants. The amendments modified the previous SEC recordkeeping requirements regarding the maintenance and preservation of electronic records, the use of third-party recordkeeping services, and the prompt production of records.

Below is a summary of the key amendments to SEC Rule 17a-4:

• Electronic Storage Media – The SEC replaced the term “electronic storage media” with “electronic recordkeeping system.” An “electronic recordkeeping system” is defined as “a system that preserves the records in a digital format in a manner that permits the records to be viewed and downloaded.”
• Designated Examining Authority Notification – The SEC Rule 17a-4 amendments eliminated the requirement for a broker-dealer to notify its designated examining authority before employing an electronic recordkeeping system.
• WORM Format – Broker-dealers are now permitted an option to preserve records. Firms can use an electronic recordkeeping system that meets WORM requirements or an audit trail alternative.
• Third-Party Undertaking – Rule 17a-4(f) provides an alternative to the third-party undertaking. Broker-dealers are now permitted to have a “designated third party” or a “designated executive officer” to perform the undertaking function. The designated executive officer must have access to and the ability to provide records directly or through a “specialist” who reports directly or indirectly to the executive officer. In addition, the designated executive officer may appoint up to two officers and three specialists to fulfill the designated executive officers’ responsibilities and assist them in fulfilling their obligations as set forth in the undertakings.
  
  Because the language of the Third-Party Access Undertaking has been revised, firms electing to continue using their current third-party access arrangements to comply with SEC Rule 17a-4(f) must ensure that the third-party files new undertakings which include the amended language with FINRA. These undertakings to satifsy the new books and records retention requirement must be submitted to FINRA by May 3, 2023.
• Alternative Undertaking for Electronic Record Storage – The SEC Rule 17a-4 amendments provide flexibility to the undertaking requirement for broker-dealers that use servers or other storage devices owned or operated by a third party to remain in compliance. The amendments allow third parties (e.g., cloud service providers), which are unable to provide the undertaking required in Rule 17a-4(f), to use an alternative undertaking. 
• Reasonably Useable Format – Paragraph (j) of SEC Rule 17a-4(f) has also been revised to require any broker-dealer records required to be preserved under Rule 17a-4 to be furnished in a “reasonably usable electronic format” when requested by the SEC. “Reasonably usable electronic format” has been defined as a “format that is compatible with commonly used systems for accessing and reading electronic records.” 

FINRA also published a chart that summarizes the most significant changes to Rule 17a-4.

Conclusion

The SEC Rule 17a-4(f) amendments are a welcome change for broker-dealers’ recordkeeping obligations that reflect technological developments and address some of the outdated books and records requirements. 

Firms should keep in mind that, while the SEC recordkeeping requirements amendments provide new ways to satisfy existing recordkeeping requirements, they also enforce some new obligations. In summary, firms will need to:

• ensure they can produce records in human readable and reasonably useable electronic formats, 
• file revised undertakings relating to the use of designated third parties, 
• update their written supervision procedures to address the new requirements and how the firm addresses them, and 
• file alternative undertakings (if using a cloud service provider)

The amendments became effective January 3, 2023, with a compliance date of May 3, 2023 for broker-dealers.

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For more information about SEC Rule 17a-4(f) amendments, or how ACA can help you comply with the updated requirements, please contact your ACA consultant or contact us here.

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