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

Federal RegisterDec 16, 2019

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 240, and 249

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

RIN 3235-AL45

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

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

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

DATES:

Effective date:

February 14, 2020.

Compliance date:

The compliance dates are discussed in section III.B. of this release.

FOR FURTHER INFORMATION CONTACT:

Michael A. Macchiaroli, Associate Director, at (202) 551-5525; Thomas K. McGowan, Associate Director, at (202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202) 551-5522; Joseph I. Levinson, Senior Special Counsel, at (202) 551-5598; Raymond A. Lombardo, Assistant Director, at (202) 551-5755; Timothy C. Fox, Branch Chief, at (202) 551-5687; Valentina Minak Deng, Special Counsel, at (202) 551-5778; Rose Russo Wells, Special Counsel, at (202) 551-5527; or Abraham Jacob, Special Counsel, at (202) 551-5583; Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background

II. Final Rules and Rule Amendments

A. Recordkeeping

1. Introduction

2. Records To Be Made and Kept Current

3. Record Maintenance and Preservation Requirements

B. Reporting

1. Introduction

2. Periodic Filing of FOCUS Report

3. Filing of Annual Audited Financial Reports and Other Reports

C. Notification

1. Introduction

2. Amendments to Rule 17a-11 and New Rule 18a-8

3. Additional Amendments to Rule 17a-11 and Modifications to Rule 18a-8

D. Quarterly Securities Count and Capital Charge for Unresolved Securities Differences

1. Introduction

2. Rule 18a-9

E. Alternative Compliance Mechanisms

1. Limited Alternative Compliance Mechanism—Rules 17a-3 and 18a-5

2. Full Alternative Compliance Mechanism—Rule 18a-10

F. Cross-Border Application and Availability of Substituted Compliance

1. Cross-Border Application of Recordkeeping and Reporting Requirements

2. Availability of Substituted Compliance in Connection With Recordkeeping and Reporting Requirements

G. Amendments to Rule 18a-1

H. Delegation of Authority

III. Explanation of Dates

A. Effective Date

B. Compliance Date

C. Effect on Existing Commission Exemptive Relief

D. Application to Substituted Compliance

IV. Paperwork Reduction Act

A. Summary of Collections of Information Under the Rule Amendments and New Rules

1. Amendments to Rule 17a-3 and New Rule 18a-5

2. Amendments to Rule 17a-4 and New Rule 18a-6

3. Amendments to Rule 17a-5 and New Rule 18a-7

4. Amendments to Rule 17a-11 and New Rule 18a-8

5. Amendments to Rule 17a-12

6. New Rule 18a-9

7. Amendments to Rule 18a-10

8. Amendments to Rule 3a71-6

B. Use of Information

C. Respondents

D. Total Initial and Annual Recordkeeping and Reporting Burden

1. Amendments to Rule 17a-3 and New Rule 18a-5

2. Amendments to Rule 17a-4 and New Rule 18a-6

3. Amendments to Rule 17a-5 and New Rule 18a-7

4. Amendments to Rule 17a-11 and New Rule 18a-8

5. Amendments to Rule 17a-12

6. New Rule 18a-9

7. Amendments to Rule 18a-10

8. Amendments to Rule 3a71-6

E. Collection of Information Is Mandatory

F. Confidentiality

G. Retention Period for Recordkeeping Requirements

V. Economic Analysis

A. Introduction

B. Baseline of Economic Analysis

1. Available Data From the Security-Based Swap Market

2. Security-Based Swap Market: Market Participants and Activity

3. Existing Regulation of OTC Derivatives Market Participants and Broker-Dealers

C. Analysis of the Adopted Program and Alternatives

1. Benefits of Recordkeeping, Reporting, Notification, and Securities Count Requirements

2. Costs of the Recordkeeping, Reporting, Notification, and Securities Count Requirements

3. Economic Effects of the Approach to Recordkeeping, Reporting, Notification, and Securities Count Requirements

4. Cross-Border Application and Substituted Compliance

D. Impact on Efficiency, Competition, and Capital Formation

E. Alternatives to the Adopted Recordkeeping, Reporting, Notification, and Securities Count Rules

VI. Other Matters

VII. Regulatory Flexibility Act Certification

VIII. Statutory Basis

I. Background

Title VII of the Dodd-Frank Act (“Title VII”) established a new regulatory framework for the U.S. over-the-counter (“OTC”) derivatives markets.

Section 764 of the Dodd-Frank Act added Section 15F to the Exchange Act.

Section 15F(f)(2) provides that the Commission shall adopt rules governing reporting and recordkeeping for SBSDs and MSBSPs. Section 15F(f)(1)(A)

provides that SBSDs and MSBSPs shall make such reports as are required by the Commission, by rule or regulation, regarding the transactions and positions and financial condition of the SBSD or MSBSP. Section 15F(f)(1)(B)(ii) provides that SBSDs and MSBSPs without a prudential regulator

(respectively, “nonbank SBSDs” and “nonbank MSBSPs”) shall keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation.

Section 15F(f)(1)(B)(i) provides that SBSDs and MSBSPs for which there is a prudential regulator (respectively, “bank SBSDs” and “bank MSBSPs”) shall keep books and records of all activities related to their business as an SBSD or MSBSP in such form and manner and for such period as may be prescribed by the Commission by rule or regulation. Section 15F(g) of the Exchange Act requires SBSDs and MSBSPs to maintain daily trading records with respect to security-based swaps and provides that the Commission shall adopt rules governing daily trading records for SBSDs and MSBSPs. Finally, Section 15F(i)(2) of the Exchange Act provides that the Commission shall adopt rules governing documentation standards for SBSDs and MSBSPs.

See

Public Law 111-203, 701 through 774. The Dodd-Frank Act assigns primary responsibility for the oversight of the U.S. OTC derivatives markets to the Commission and the Commodity Futures Trading Commission (“CFTC”). The Commission has oversight authority with respect to a “security-based swap” as defined in Section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)), including to implement a registration and oversight program for a “security-based swap dealer” as defined in Section 3(a)(71) and a “major security-based swap participant” as defined in Section 3(a)(67). The CFTC has oversight authority with respect to a “swap” as defined in Section 1(a)(47) of the Commodity Exchange Act (“CEA”) (7 U.S.C. 1(a)(47)), including to implement a registration and oversight program for a “swap dealer” as defined in Section 1(a)(49) of the CEA (7 U.S.C. 1(a)(49)) and a “major swap participant” as defined in Section 1(a)(33) of the CEA (7 U.S.C. 1(a)(33)). The Commission and the CFTC jointly have adopted rules to further define these terms

See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement;” Mixed Swaps; Security-Based Swap Agreement Recordkeeping,

Exchange Act Release No. 67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012);

Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant,”

Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012).

15 U.S.C. 78

-10 (“Section 15F of the Exchange Act” or “Section 15F”).

The term “prudential regulator” is defined in Section 1(a)(39) of the CEA (7 U.S.C. 1(a)(39)) and that definition is incorporated by reference in Section 3(a)(74) of the Exchange Act. Pursuant to the definition, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Office of the Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), the Farm Credit Administration, or the Federal Housing Finance Agency (collectively, the “prudential regulators”) is the “prudential regulator” of an SBSD, MSBSP, swap dealer, or major swap participant if the entity is directly supervised by that agency.

A nonbank SBSD or MSBSP could be dually registered with the Commission as a broker-dealer (respectively, a “broker-dealer SBSD” or “broker-dealer MSBSP”) or registered with the Commission only as an SBSD or MSBSP (respectively, a “stand-alone SBSD” or “stand-alone MSBSP”). Any of these registrants or a bank SBSD or bank MSBSP also could register with the CFTC as a futures commission merchant (“FCM”), swap dealer, or major swap participant.

Section 17(a)(1) of the Exchange Act provides the Commission with authority to adopt rules requiring broker-dealers—which would include broker-dealer SBSDs and MSBSPs—to make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.

The Commission anticipates that a number of broker-dealers will register as SBSDs.

The Commission expects that some broker-dealers that are not registered as SBSDs or MSBSPs (“stand-alone broker-dealers”) nonetheless will engage in security-based swap and swap activities.

See

15 U.S.C. 78q(a)(1) (“Section 17 of the Exchange Act” or “Section 17”). Section 771 of the Dodd-Frank Act states that unless otherwise provided by its terms, Subtitle B of Title VII (relating to the regulation of the security-based swap markets) does not divest any appropriate Federal banking agency, the Commission, the CFTC, or any other Federal or State agency, of any authority derived from any other provision of applicable law.

While it is anticipated that some broker-dealers and banks will register as SBSDs in order to engage in security-based swap activities, it is unclear whether broker-dealers or banks will register as MSBSPs.

In this release, the term “broker-dealer” includes an OTC derivatives dealer unless otherwise noted.

See

17 CFR 240.3b-12 (defining the term “OTC derivatives dealer”). Consequently, the terms “stand-alone broker-dealer,” “broker-dealer SBSD,” and “broker-dealer MSBSP” include entities that are OTC derivatives dealers unless otherwise noted.

In April 2014, the Commission proposed recordkeeping, reporting, and notification requirements applicable to SBSDs and MSBSPs, securities count requirements applicable to certain SBSDs, and additional recordkeeping requirements applicable to broker-dealers to account for their security-based swap and swap activities.

The proposed requirements were modeled on existing broker-dealer requirements.

The Commission received a number of comments in response to these proposals.

Separately, the Commission proposed rules governing the cross-border treatment of recordkeeping and reporting requirements with respect to SBSDs and MSBSPs.

The Commission received comments in response to these cross-border proposals as well.

The Commission carefully considered the comments received on the proposals described above and, as discussed below, made modifications in light of the comments in crafting final rules and amendments.

See Recordkeeping and Reporting Proposing Release; Capital Rule for Certain Security-Based Swap Dealers,

Exchange Act Release No. 71958 (Apr. 17, 2014), 79 FR 25194 (May 2, 2014) (“

Recordkeeping and Reporting Proposing Release

”).

See id.

at 25196-97 (providing the rationale for modeling the proposed requirements on the relevant broker-dealer requirements).

The comment letters are available at

https://www.sec.gov/comments/s7-05-14/s70514.shtml.

See Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants,

Exchange Act Release No. 69490 (May 1, 2013), 78 FR 30968 (May 23, 2013) (“

Cross-Border Proposing Release

”).

The comment letters are available at

https://www.sec.gov/comments/s7-02-13/s70213.shtml.

In this document, the Commission is amending certain existing rules and adopting new rules. In particular, the Commission is amending existing rules 17 CFR 240.17a-3 (“Rule 17a-3”), 17 CFR 240.17a-4 (“Rule 17a-4”), 17 CFR 240.17a-5 (“Rule 17a-5”), and 17 CFR 240.17a-11 (“Rule 17a-11”), and adopting new rules 17 CFR 240.18a-5 (“Rule 18a-5”), 17 CFR 240.18a-6 (“Rule 18a-6”), 17 CFR 240.18a-7 (“Rule 18a-7”), 17 CFR 240.18a-8 (“Rule 18a-8”), and 17 CFR 240.18a-9 (“Rule 18a-9”). The amendments and new rules establish recordkeeping, reporting, and notification requirements for SBSDs and MSBSPs and securities count requirements for stand-alone SBSDs (collectively “recordkeeping and reporting requirements”). The amendments to Rules 17a-3 and 17a-4 also establish additional recordkeeping requirements applicable to stand-alone broker-dealers to the extent they engage in security-based swap or swap activities. The Commission also is adopting largely technical amendments to Rules 17a-3, 17a-4, 17a-5, and 17a-11 as well as a conforming amendment to existing rule 17 CFR 240.17a-12 (“Rule 17a-12”).

Further, the Commission is adopting amendments to Parts II and III of the Financial and Operational Combined Uniform Single Report (“FOCUS Report”),

and adopting Part IIC of the FOCUS Report. Part II of the FOCUS Report, as amended, and Part IIC of the FOCUS Report, as adopted, will be used by registrants to report financial and operational information. Part III of the FOCUS Report will accompany the annual reports that certain of the registrants will file. The Commission also is amending existing rule 17 CFR 240.3a71-6 (“Rule 3a71-6”) with respect to the cross-border application of the recordkeeping and reporting rules and the availability of substituted compliance.

The amendments to Rule 17a-12 replace the phrase “Part IIB” with the phrase “Part II” each time it appears in the rule, thereby requiring OTC derivatives dealers to file FOCUS Report Part II, as amended, instead of FOCUS Report Part IIB.

The FOCUS Report is also known as Form X-17A-5.

On June 21, 2019, the Commission adopted, among other requirements, capital and margin requirements for nonbank SBSDs and MSBSPs and segregation requirements for SBSDs.

As discussed below, these capital, margin, and segregation requirements are integrated into the recordkeeping and reporting requirements being adopted in this document. Moreover, at the same time that the Commission adopted the capital, margin, and segregation requirements, the Commission adopted an alternative compliance mechanism (17 CFR 240.18a-10 “Rule 18a-10”).

The Commission is amending Rule 18a-10 in this document to incorporate recordkeeping and reporting requirements into its provisions. The Commission also is amending an SBSD capital rule (17 CFR 240.18a-1 “Rule 18a-1”).

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers,

Exchange Act Release No. 86175 (Jun. 21,

2019), 84 FR 43872 (Aug. 22, 2019) (“

Capital, Margin, and Segregation Adopting Release

”).

See Capital, Margin, and Segregation Adopting Release

at 43943-46.

The Commission staff consulted with staff from the prudential regulators and the CFTC in drafting these final rules and amendments.

In addition, relevant CFTC rules were considered as part of this rulemaking effort.

See

Section 712(a)(2) of the Dodd-Frank Act.

The CFTC has adopted recordkeeping and reporting rules for swap dealers and major swap participants.

See Swap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants,

77 FR 20128 (Apr. 3, 2012).

II. Final Rules and Rule Amendments

A. Recordkeeping

1. Introduction

The Commission is adopting a recordkeeping program for SBSDs and MSBSPs under Sections 15F and 17(a) of the Exchange Act that is modeled on the recordkeeping requirements for broker-dealers as set forth in Rules 17a-3 and 17a-4. Under this recordkeeping program, broker-dealer SBSDs and MSBSPs—as broker-dealers—will be subject to Rules 17a-3 and 17a-4.

The Commission is adopting amendments to these rules to implement the recordkeeping requirements mandated under the Dodd-Frank Act with respect to broker-dealer SBSDs and MSBSPs and to account for the security-based swap and swap activities of stand-alone broker-dealers.

A commenter requested clarification as to whether an OTC derivatives dealer dually registered as an SBSD or MSBSP would be subject to Rules 17a-3 and 17a-4, as amended, or Rules 18a-5 and 18a-6. An OTC derivatives dealer dually registered as an SBSD or MSBSP is subject to Rules 17a-3 and 17a-4 (rather than Rules 18a-5 and 18a-6). The undesignated introductory paragraphs to Rules 17a-3, 17a-4, 18a-5, and 18a-6 have been modified to clarify this application of the rules. In addition, as explained further below, an OTC derivatives dealer dually registered as an SBSD will be subject to Rules 18a-1, 18a-4, 18a-7, 18a-8, and 17a-13 rather than 15c3-1, 15c3-3, 17a-5, 17a-11, and Rules 18a-9. As a result, the Commission has made the following conforming modifications to Rules 17a-3, 17a-4, 18a-7, and 18a-8: (1) Where Rules 17a-3 and 17a-4 refer to Rules 17a-5 or 17a-12, the Commission has added references to Rule 18a-7; (2) where Rules 17a-3 and 17a-4 refer to Rule 15c3-1, the Commission has added references to Rule 18a-1, if appropriate; and (3) where Rules 17a-3 and 17a-4 refer to Rule 15c3-3, the Commission has added references to Rule 18a-4.

Stand-alone and bank SBSDs and MSBSPs will be subject to Rules 18a-5 and 18a-6, which are modeled on Rules 17a-3 and 17a-4, respectively, as amended. Rules 18a-5 and 18a-6 do not include a parallel requirement for every requirement in Rules 17a-3 and 17a-4 because some of the requirements in Rules 17a-3 and 17a-4 relate to activities that are either not expected or not permitted to be conducted by stand-alone and bank SBSDs and MSBSPs. Further, the recordkeeping requirements applicable to bank SBSDs and MSBSPs are more limited in scope because: (1) The Commission's authority under Section 15F(f)(1)(B)(i) of the Exchange Act is tied to activities related to the conduct of the firm's business as an SBSD or MSBSP; (2) bank SBSDs and MSBSPs are subject to recordkeeping requirements applicable to banks with respect to their banking activities; and (3) the prudential regulators—rather than the Commission—are responsible for capital, margin, and other prudential requirements applicable to bank SBSDs and MSBSPs. For these reasons, the recordkeeping requirements for bank SBSDs and MSBSPs are tailored more specifically to their security-based swap activities as an SBSD or MSBSP.

2. Records To Be Made and Kept Current

The Commission is adopting amendments to Rule 17a-3 to account for the security-based swap and swap activities of broker-dealers, including broker-dealer SBSDs and MSBSPs.

The Commission is adopting Rule 18a-5—which is modeled on Rule 17a-3, as amended—to require stand-alone and bank SBSDs and MSBSPs to make and keep current certain records.

As stated above, Rule 18a-5 does not include a parallel requirement for every requirement in Rule 17a-3.

Paragraph (a) of Rule 18a-5 contains one set of recordkeeping requirements applicable to stand-alone SBSDs and MSBSPs, and paragraph (b) of Rule 18a-5 contains a separate set of recordkeeping requirements applicable to bank SBSDs and MSBSPs that are more limited in scope.

Broker-dealer SBSDs and MSBSPs are required to make and keep current all the records required to be made and kept current by broker-dealers under Rule 17a-3, as amended, plus the additional records required specifically of an SBSD or MSBSP.

See

Rule 18a-5, as adopted. Paragraphs (a) and (b) of Rule 18a-5 now read “make and keep current” instead of “make and keep” as proposed, to clarify the implicit requirement that a firm's records should be current. This language is consistent with Rule 17a-3, as amended, on which Rule 18a-5 is modeled.

The Commission did not propose to include in Rule 18a-5 requirements that would parallel those set forth in paragraphs (a)(4), (13) through (16), (19), and (20) of Rule 17a-3.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25200, n. 67.

A commenter urged the Commission to harmonize its recordkeeping requirements for SBSDs and MSBSPs with the CFTC's final recordkeeping requirements for swap dealers and major swap participants to the maximum extent possible, with the goal of permitting firms to utilize a single recordkeeping system for swap and security-based swap transactions and positions.

As discussed in more detail below in section II.E.1. of this release, in response to the comment and to promote harmonization with CFTC requirements, the Commission is adopting a limited alternative compliance mechanism in Rules 17a-3 and 18a-5.

In particular, an SBSD or MSBSP that also is registered with the CFTC as a swap dealer or major swap participant may comply with the recordkeeping requirements of the CEA and the rules thereunder in lieu of the requirements (discussed below) to make and keep current trade blotters, customer account ledgers, and stock records solely with respect to information required to be included in those records regarding security-based swap transactions and positions if the SBSD or MSBSP meets certain conditions. The conditions include,

among other things, that the SBSD or MSBSP preserves all of the data elements necessary to create a trade blotter, customer account ledger, or stock record reflecting security-based swap and swap transactions and positions and upon request promptly furnishes to representatives of the Commission such a trade blotter, customer account ledger, or stock record that includes security-based swap

and

swap transactions and positions in the format required by Rule 17a-3 or 18a-5, as applicable. This provision will permit an SBSD or MSBSP that also is registered with the CFTC as a swap dealer or major swap participant to maintain a single recordkeeping system for security-based swap and swap transactions and positions in accordance with the CFTC's rules with respect to these required records.

See

Letter from Mary Kay Scucci, Managing Director, Securities Industry and Financial Markets Association (Sept. 5, 2014) (“SIFMA 9/5/2014 Letter”).

See

paragraph (b) of Rule 17a-3, as amended; paragraph (c) of Rule 18a-5, as adopted. As discussed in more detail below in section II.E.2. of this release, the Commission also is amending Rule 18a-10. Rule 18a-10 establishes a full alternative compliance mechanism that will permit certain stand-alone SBSDs that are registered as swap dealers and that predominantly engage in a swaps business to elect to comply with the capital, margin, and segregation requirements of the CEA and the CFTC's rules in lieu of complying with the capital, margin, and segregation requirements of the Commission's rules. The Commission is amending Rule 18a-10 in this document to permit firms that will operate under Rule 18a-10 to elect to comply with the recordkeeping and reporting requirements of the CEA and the CFTC's rules in lieu of complying with Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9. Consequently, a stand-alone SBSD that qualifies to use the full alternative compliance mechanism of Rule 18a-10 can comply with the recordkeeping requirements of the CEA and the CFTC's rules in lieu of complying with the requirements of Rule 18a-5.

Rules 17a-3 and 18a-5 require broker-dealers, SBSDs, and MSBSPs to make and keep current daily trading records, ledger accounts, a securities record, memoranda of brokerage orders, and/or memoranda of proprietary trades that include certain data elements with respect to security-based swap transactions.

The data elements are: (1) The type of security-based swap; (2) the reference security, index, or obligor; (3) the date and time of execution; (4) the effective date; (5) the scheduled termination date; (6) the notional amount(s) and the currenc(ies) in which the notional amount(s) is expressed; (7) the unique transaction identifier; and (8) the counterparty's unique identification code (collectively, the “transaction data elements”).

See

paragraphs (a)(1) and (3), (a)(5)(ii), (a)(6)(ii), and (a)(7)(ii) of Rule 17a-3, as amended; paragraphs (a)(1) and (3), (a)(4)(ii), (a)(5), (b)(1) and (2), (b)(3)(ii), and (b)(4) and (5) of Rule 18a-5, as adopted.

See

paragraphs (a)(1) and (3), (a)(5)(ii), and (a)(6) of Rule 17a-3, as amended; paragraphs (a)(1) and (3) through (5) and (b)(1) through (5) of Rule 18a-5, as adopted.

As proposed, the counterparty's unique identification code data element was the unique counterparty identifier.

Commenters suggested that the Commission replace the requirement to record the unique counterparty identifier with a requirement to record the counterparty's legal entity identifier (“LEI”).

One commenter further stated that the Commission should allow firms to use different counterparty identifiers for internal purposes provided that they are able to translate their internal counterparty identifiers into the standard LEI convention.

See, e.g.,

Recordkeeping and Reporting Proposing Release,

79 FR at 25201.

See

SIFMA 9/5/2014 Letter; Letter from Senator Carl Levin, Chairman of Permanent Subcommittee on Investigations, U.S. Senate (July 3, 2014) (“Levin Letter”).

See

SIFMA 9/5/2014 Letter.

For the sake of consistency with previously adopted Commission rules, the Commission is replacing the requirement to record the unique counterparty identifier throughout Rule 17a-3, as amended, and Rule 18a-5, as adopted, with a requirement to use the counterparty's unique identification code (“UIC”), as defined in Regulation SBSR.

In particular, Regulation SBSR requires market participants—including broker-dealers, SBSDs, and MSBSPs—to report certain data elements to security-based swap data repositories (“SDRs”). One of the required data elements is a UIC, which Rule 900 of Regulation SBSR defines as “a unique identification code assigned to a person, unit of a person, product, or transaction.”

SDRs must use UICs assigned by an internationally recognized standards-setting system (“IRSS”) if an IRSS has been recognized by the Commission and issues that type of UIC.

In the release adopting Regulation SBSR, the Commission recognized the Global Legal Entity Identifier System (“GLEIS”)—which is responsible for issuing LEIs—as an IRSS that satisfies the requirements of Rule 903 of Regulation SBSR.

Under Rule 903, if an IRSS recognized by the Commission has assigned a UIC to a person, unit of a person, or product, each SDR must employ that UIC for reporting purposes under Regulation SBSR, and SDR participants must obtain such UICs for use under Regulation SBSR. Although a firm may use different counterparty identifiers for internal purposes, the firm's records compiled pursuant to the recordkeeping rules being adopted in this document must record the counterparty's UIC. To date, LEIs are the only specific type of UIC that must be used under Regulation SBSR.

17 CFR 242.900-242.909.

See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information,

Exchange Act Release No. 74244 (Feb. 11, 2015), 80 FR 14563 at 14631-14632 (Mar. 19, 2015).

See

17 CFR 242.900(qq).

See

17 CFR 242.903 (“Rule 903”).

See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information,

80 FR at 14631-32.

While the Commission to date has only recognized the GLEIS as an IRSS, the rules being adopted in this document do not preclude the use of UICs issued by any other organization that is recognized as an IRSS in the future.

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

See

17 CFR 242.901 (“Rule 901”);

Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information,

Exchange Act Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug. 12, 2016).

The Commission stated when proposing the recordkeeping requirements that “[w]here a data element that would need to be documented in the daily trading records of security-based swap transactions under the proposed amendments to Rule 17a-3 or proposed Rule 18a-5 is substantively the same as a data element that would need to be reported under proposed Rule 901, the Commission preliminarily believes that the type of information that would need to be documented in the daily trading records could be the same data element reported under proposed Rule 901.”

The following data element requirements being adopted in this document use the same terminology as Rule 901 of Regulation SBSR: (1) The date and time of execution; (2) the effective date; (3) the scheduled termination date; and (4) the notional amount(s) and the currenc(ies) in which the notional amount(s) is expressed. The Commission clarifies that for these data elements registrants may record the same information provided pursuant to the requirements of Rule 901 to satisfy the related requirements of Rules 17a-3, as amended, and 18a-5, as adopted.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25201.

Finally, a commenter urged the Commission to provide firms with the flexibility to keep the proposed required trade blotters, general ledgers, ledgers for customer accounts, and stock record (discussed below) in various formats without mandating a particular format as long as all required information is kept and accessible to the Commission.

For example, with respect to the stock record, the commenter urged the Commission to provide SBSDs and MSBSPs flexibility in the manner in which they create records for security-based swap transactions and not mandate a detailed specified format (particularly with respect to tracking collateral received and pledged), provided that all required information is recorded and retained and can be pulled together upon request to create something that recognizably

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

See

SIFMA 9/5/2014 Letter.

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

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

a. Amendments to Rule 17a-3 and New Rule 18a-5

Undesignated Introductory Paragraph

The Commission proposed adding an undesignated introductory paragraph to Rule 17a-3 explaining that the rule applies to a broker-dealer, including a broker-dealer dually registered with the Commission as an SBSD or MSBSP.

The paragraph further explained that an SBSD or MSBSP that is not dually registered as a broker-dealer (

i.e.,

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

See Recordkeeping and Reporting Proposing Release,

79 FR at 25201.

See

undesignated introductory paragraph of Rule 17a-3, as amended; undesignated introductory paragraph of Rule 18a-5, as adopted.

Trade Blotters

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

The Commission proposed to include parallel trade blotter requirements in Rule 18a-5 to apply to stand-alone and bank SBSDs and MSBSPs.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25201.

As discussed above, a commenter urged the Commission to provide firms with the flexibility to keep the proposed trade blotters in various formats without mandating a particular format as long as all required information is kept and accessible to the Commission.

For the reasons discussed above, the Commission does not believe this would be appropriate. However, the Commission clarifies that a firm can create two separate trade blotters (one for security-based swaps and one for other types of positions). Moreover, as discussed in more detail below in section II.E.1. of this release, to promote harmonization with CFTC requirements and increase flexibility, an SBSD or MSBSP that is also registered as a swap dealer or major swap participant may opt to use the limited alternative compliance mechanism with respect to these records as they pertain to security-based swap and swap transactions and positions.

For these reasons, the Commission is adopting the trade blotter requirements substantially as proposed.

See

SIFMA 9/5/2014 Letter.

See

paragraph (b) of Rule 17a-3, as amended; paragraph (c) of Rule 18a-5, as adopted.

See

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

General Ledger

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

See Recordkeeping and Reporting Proposing Release,

79 FR at 25201-02.

As discussed above, a commenter urged the Commission to provide firms with the flexibility to keep the proposed general ledger in various formats as long as all required information is kept and accessible to the Commission.

For the reasons discussed above, the Commission does not believe this would be appropriate. Moreover, as discussed above, the Commission does not believe it would be appropriate to apply the limited alternative compliance mechanism for this record because the information that must be recorded in a general ledger is broader than security-based swap information.

For this reason, the Commission is adopting the general ledger requirement as proposed.

See

SIFMA 9/5/2014 Letter.

However, a stand-alone SBSD that qualifies to use the full alternative compliance mechanism of Rule 18a-10 may comply with the recordkeeping requirements of the CEA and the CFTC's rules in lieu of complying with the requirements of Rule 18a-5.

See

paragraph (a)(2) of Rule 18a-5, as adopted.

Ledgers for Customer and Non-Customer Accounts

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

commodities transactions in customer and non-customer cash and margin accounts. The Commission proposed to amend this paragraph to require that broker-dealers, including broker-dealer SBSDs and MSBSPs, make and keep current ledger accounts (or other records) that record specific security-based swap transaction data elements.

The Commission proposed in Rule 18a-5 that stand-alone SBSDs and MSBSPs be required to make and keep current the same types of ledgers (or other records). However, the proposed rule text did not refer to “cash and margin accounts” because these types of accounts involve activities that may not be undertaken by stand-alone SBSDs and MSBSPs because they are not registered as broker-dealers. The Commission proposed in Rule 18a-5 that bank SBSDs and MSBSPs make and keep current ledger accounts (or other records) relating to securities and commodity transactions, but only with respect to their security-based swap customers and non-customers.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25202.

As discussed above, a commenter urged the Commission to provide firms with the flexibility to keep the proposed ledgers for customer accounts in various formats as long as all required information is kept and accessible to the Commission.

For the reasons discussed above, the Commission does not believe this would be appropriate. However, as discussed in more detail below in section II.E.1. of this release, to promote harmonization with CFTC requirements and provide additional flexibility, an SBSD or MSBSP that is also registered as a swap dealer or major swap participant may opt to use the limited alternative compliance mechanism with respect to these ledgers as they pertain to security-based swap and swap transactions and positions.

For these reasons, the Commission is adopting the ledger account requirements substantially as proposed.

See

SIFMA 9/5/2014 Letter.

See

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

See

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

Stock Record

Paragraph (a)(5) of Rule 17a-3 requires broker-dealers to make and keep current a securities record (also referred to as a “stock record”). This is a record of the broker-dealer's custody and movement of securities. The “long” side of the record accounts for the broker-dealer's responsibility as a custodian of securities and shows, for example, the securities the firm has received from customers and securities owned by the broker-dealer. The “short” side of the record shows where the securities are located, such as at a securities depository. The Commission proposed to amend this paragraph to require that the securities record of broker-dealers, including broker-dealer SBSDs and MSBSPs, specifically account for security-based swap activity by reflecting separately for each security-based swap certain of the transaction data elements and other information.

In addition, the Commission proposed parallel securities record requirements in Rule 18a-5 for stand-alone and bank SBSDs and MSBSPs. However, the requirements for bank SBSDs and MSBSPs were limited to positions related to their business as an SBSD or MSBSP.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25202.

As discussed above, a commenter urged the Commission to provide firms with the flexibility to keep the proposed stock record in various formats as long as all required information is kept and accessible to the Commission.

For the reasons discussed above, the Commission does not believe this would be appropriate. However, as discussed in more detail below in section II.E.1. of this release, to promote harmonization with CFTC requirements and increase flexibility, an SBSD or MSBSP that is also registered as a swap dealer or major swap participant may opt to use the limited alternative compliance mechanism with respect to the stock record as it pertains to security-based swap and swap transactions and positions.

The Commission also clarifies that the requirement as adopted does not necessarily require the use of two separate stock records (

i.e.,

one for securities and one for security-based swaps); instead, a broker-dealer SBSD may elect to use a single stock record that incorporates all of its securities customers, including security-based swap customers.

See

SIFMA 9/5/2014 Letter.

See

A commenter stated that the Commission should replace the terms “long” and “short” in the proposed requirements with “bought” and “sold,” respectively.

The commenter explained that the former two terms were “not really applicable” to security-based swaps. The Commission agrees and the final amendment and rule use the terms “bought” and “sold.” For the reasons discussed above, the Commission is adopting the stock record requirements with this modification but otherwise substantially as proposed.

See

SIFMA 9/5/2014 Letter.

See

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

Memoranda of Brokerage Orders

Paragraph (a)(6) of Rule 17a-3 requires broker-dealers to make and keep current a memorandum of each brokerage order, and of any other instruction, given or received for the purchase or sale of a security. The memorandum must show the terms and conditions of each brokerage order. The Commission proposed to amend this paragraph to require broker-dealers, including broker-dealer SBSDs and MSBSPs, to make and keep current a memorandum of each brokerage order given or received for the purchase or sale of a security-based swap.

Further, the rule required that certain of the security-based swap transaction data elements be documented in the memorandum. The Commission proposed a parallel provision in Rule 18a-5 for bank SBSDs and MSBSPs. The Commission did not propose a parallel provision for stand-alone SBSDs and MSBSPs because these registrants are not permitted to engage in the business of effecting brokerage orders in security-based swaps without registering as a broker-dealer or a bank.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25202-03.

Generally, persons engaged in brokerage activities are required to register as brokers under

Section 15 of the Exchange Act. However, Section 3(a)(4) of the Exchange Act permits banks to engage in certain limited securities brokerage activities.

See also

17 CFR 247.100-781 (joint Commission and the Federal Reserve rules establishing further exemptions permitting banks to engage in certain securities brokerage activities without registering as a broker-dealer). Consequently, a bank SBSD or MSBSP may act as a broker or agent in a security-based swap transaction. In such instances, the brokerage order record requirements of paragraph (b)(4) of Rule 18a-5 would apply.

A commenter expressed general support for the proposed requirements but asked the Commission to confirm that the order ticket requirement only applies when there are in fact orders received for execution (

i.e.,

where the orders are potentially executed on a security-based swap execution facility), and not where there is a negotiation that results in a transaction without any executable order or other instruction given.

Furthermore, the commenter also asked the Commission to confirm that no order ticket needs to be created by the broker-dealer or its affiliated SBSD when a registered broker-dealer acts as an agent in connection with negotiated transactions between an affiliated SBSD and its customers without any executable order being received. In response, the Commission clarifies that the firm must receive an executable order or other instruction to trigger the memorandum requirement (

i.e.,

an order or instruction that the broker-dealer, SBSD, or MSBSP has agreed to execute on behalf of the counterparty). Consequently, preliminary negotiations or responding to questions about a potential transaction alone do not trigger the recordkeeping requirement. For these reasons, the Commission is adopting these requirements substantially as proposed.

See

SIFMA 9/5/2014 Letter.

See

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

Memoranda of Proprietary Orders

Paragraph (a)(7) of Rule 17a-3 requires broker-dealers to make and keep current a memorandum of each purchase and sale for the account of the broker-dealer. Generally, this paragraph requires broker-dealers to document the terms of securities transactions where they are acting as a dealer or otherwise trading for their own account. The Commission proposed to amend this paragraph to require the terms of security-based swap transactions to be documented as well.

In addition, the Commission proposed parallel memorandum requirements in Rule 18a-5 for stand-alone and bank SBSDs and MSBSPs, but only with respect to security-based swap transactions. The Commission received no comment that specifically addressed these proposed requirements and is adopting them substantially as proposed.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25203-04.

See

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

Confirmations

Paragraph (a)(8) of Rule 17a-3 requires broker-dealers to keep copies of all trade confirmations. In addition, the Commission has adopted rules that require SBSDs and MSBSPs to provide trade acknowledgments containing the details of a security-based swap transaction within prescribed timeframes and to establish, maintain, and enforce written policies and procedures that are reasonably designed to obtain prompt verification of the terms of the trade acknowledgments.

In particular, Rule 15Fi-2 requires SBSDs and MSBSPs to promptly verify the accuracy of, or otherwise dispute with their counterparties, the terms of trade acknowledgments they receive.

See

17 CFR 240.15Fi-2 (“Rule 15Fi-2”);

see also Trade Acknowledgment and Verification of Security-Based Swap Transactions,

Exchange Act Release No. 78011 (June 8, 2016), 81 FR 39807 (June 17, 2016).

The Commission proposed to amend paragraph (a)(8) of Rule 17a-3 to require that broker-dealers, including broker-dealer SBSDs and MSBSPs, make and keep current copies of the security-based swap trade acknowledgments and verifications made pursuant to Rule 15Fi-2.

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

See Recordkeeping and Reporting Proposing Release,

79 FR at 25204.

A commenter stated that the Commission should not require a bank SBSD or MSBSP to make and keep current copies of all confirmations of all purchases and sales of securities (other than security-based swaps) or, in the alternative, the Commission should narrowly interpret when securities transactions are “related to the business” of a bank as an SBSD or MSBSP.

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

See

SIFMA 9/5/2014 Letter.

See

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

Accountholder Information

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

based swap accountholders.

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

See Recordkeeping and Reporting Proposing Release,

79 FR at 25204.

A commenter stated that it is not common practice in the swaps market to obtain signatures of persons authorized to transact business on behalf of a counterparty in a swap account and recommended instead that broker-dealers, SBSDs, and MSBSPs be permitted to satisfy this requirement by establishing policies and procedures relating to counterparty trade authorization.

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

See

SIFMA 9/5/2014 Letter.

Another commenter raised concerns about disclosures to the Commission regarding clients, associated persons, or other such persons arising from confidentiality requirements under the local laws of certain non-U.S. jurisdictions.

The Commission understands that some foreign laws and regulations may limit or prevent disclosure of customer information to the Commission. These types of restrictions may include privacy laws, which generally restrict disclosure of certain identifying information about a natural person or entity, and so-called “blocking statutes” (including secrecy laws) that prevent the disclosure of information relating to third parties and/or foreign governments. In response, the Commission notes that it has proposed in a separate release additional provisions that are designed to address concerns about the cross-border application of certain requirements that will be or have been proposed to be applicable to SBSDs and MSBSPs.

For the foregoing reasons, the Commission is adopting the accountholder requirements with the modifications discussed above.

See

SIFMA 9/5/2014 Letter; Letter from Institute of International Bankers and Securities Industry and Financial Markets Association (June 21, 2018) (“IIB/SIFMA 6/21/2018 Letter”).

See Proposed Rule Amendments and Guidance Addressing Cross-Border Application of Certain Security-Based Swap Requirements,

Exchange Act Release No. 85823 (May 10, 2019), 84 FR 24206 (May 14, 2019) (“

Cross-Border Application Proposing Release”

See

paragraph (a)(8)(iv) of Rule 17a-3, as amended; paragraphs (a)(7) and (b)(7) of Rule 18a-5, as adopted. These paragraphs require that SBSDs and MSBSPs record for each security-based swap account the counterparty's UIC, along with other information. For the reasons discussed above, the “unique counterparty identifier” transaction data element in the proposed requirement was replaced with the counterparty's UIC. The broker-dealer accountholder requirement for securities other than security-based swaps that pre-existed these amendments is being preserved in paragraphs (a)(1)(i) through (iii) of Rule 17a-3, as amended.

Options Positions

Paragraph (a)(10) of Rule 17a-3 requires broker-dealers to make and keep current a record of all options positions. The Commission did not propose to amend this paragraph to account for security-based swaps. In addition, because the records required under this paragraph are not specific to security-based swaps, the Commission did not propose to include an analogous provision applicable to bank SBSDs and MSBSPs. However, in order to facilitate the monitoring of the financial condition of stand-alone SBSDs and MSBSPs, the Commission proposed a parallel provision in Rule 18a-5 applicable to these entities.

One commenter expressed support for this proposed requirement.

The Commission is adopting the options position recordkeeping requirement as proposed.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25204-05.

See

SIFMA 9/5/2014 Letter.

See

paragraph (a)(8) of Rule 18a-5, as adopted.

Trial Balances and Computation of Net Capital

Paragraph (a)(11) of Rule 17a-3 requires broker-dealers, including broker-dealer SBSDs and MSBSPs, to make and keep current a record of the proof of money balances of all ledger accounts in the form of trial balances and certain records relating to the computation of aggregate indebtedness and net capital under the broker-dealer net capital rule.

The Commission did not propose that bank SBSDs and MSBSPs make similar records as the prudential regulators administer the capital requirements applicable to these entities.

The Commission did propose a parallel requirement in Rule 18a-5 for stand-alone SBSDs and MSBSPs to facilitate the review and monitoring of their financial condition and their compliance with the regulatory capital requirements in proposed Rules 18a-1 and 18a-2, respectively.

One commenter noted the importance of including recordkeeping and reporting requirements with respect to trial balances and the computation of net capital.

The Commission has adopted capital requirements for stand-alone SBSDs and MSBSPs in Rules 18a-1 and 18a-2, respectively.

Consequently, the Commission is adopting the trial balances and computation of net capital recordkeeping requirement for stand-alone SBSDs and MSBSPs as proposed.

The broker-dealer net capital rule is codified at 17 CFR 240.15c3-1 (“Rule 15c3-1”).

See Recordkeeping and Reporting Proposing Release,

79 FR at 25205.

See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers,

Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR 70241, 70217-57 (Nov. 23, 2012) (“

Capital, Margin, and Segregation Proposing Release”

) (proposing Rules 18a-1 and 18a-2).

See

SIFMA 9/5/2014 Letter. The commenter also made substantive recommendations concerning the proposed net capital requirements for SBSDs and MSBSPs that are beyond the scope of this release.

See Capital, Margin, and Segregation Adopting Release,

84 FR at 43879-908.

See

paragraph (a)(9) of Rule 18a-5, as adopted.

Associated Persons

Paragraph (a)(12) of Rule 17a-3 requires broker-dealers, including broker-dealer SBSDs and MSBSPs, to make and keep current a questionnaire or application for employment for each associated person that contains information about the associated person (the “questionnaire requirement”) as well other information about associated persons. The Commission proposed parallel requirements in Rule 18a-5 for stand-alone and bank SBSDs and MSBSPs.

Further, the Commission proposed to amend the definition of “associated person” in Rule 17a-3 to include in the definition a person associated with an SBSD or MSBSP as defined in Section 3(a)(70) of the Exchange Act. The Commission proposed a parallel definition in Rule 18a-5. However, the proposed Rule 18a-5 definition was more limited as applied to bank SBSDs and MSBSPs in that it covered persons whose activities relate to the conduct of the bank's business as an SBSD or MSBSP.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25205.

Commenters requested that the Commission limit the proposed questionnaire requirement for stand-alone and bank SBSDs and MSBSPs to associated persons who effect or are involved in effecting security-based swaps on the firm's behalf.

The Commission agrees with the comments. The questionnaire requirement, as proposed, was designed to provide a basis for assessing compliance with Section 15F(b)(6) of the Exchange Act and a related rule thereunder.

Both the statute and the rule (Rule 15Fb6-2) apply to associated persons who effect or are involved in effecting security-based swaps on behalf of the SBSD or MSBSP.

Accordingly, the Commission is narrowing the scope of the questionnaire requirement in Rule 18a-5 for stand-alone and bank SBSDs and MSBSPs so that it applies only with respect to associated persons who effect or are involved in effecting security-based swaps on the firm's behalf.

See, e.g.,

SIFMA 9/5/2014 Letter; IIB/SIFMA 6/21/2018 Letter.

See

17 CFR 15Fb6-2 (“Rule 15Fb6-2”).

Section 15F(b)(6) of the Exchange Act provides that it shall be unlawful for an SBSD or MSBSP to permit any associated person of the SBSD or MSBSP who is subject to a statutory disqualification to effect or be involved in effecting security-based swaps on its behalf, if the SBSD or MSBSP knows, or in the exercise of reasonable care should have known, of the statutory disqualification, except to the extent otherwise provided by rule, regulation, or order of the Commission. Rule 15Fb6-2: (1) Prohibits an SBSD or MSBSP from acting as an SBSD or MSBSP unless it has certified electronically that it neither knows, nor in the exercise of reasonable care should have known, that any person associated with the SBSD or MSBSP “who effects or is involved in effecting security-based swaps on behalf of the [SBSD] or [MSBSP] is subject to a statutory disqualification”; and (2) requires the Chief Compliance Officer (or his or her designee) of the SBSD or MSBSP to review and sign the questionnaire or application for employment executed by every associated person who is a natural person and who effects or is involved in effecting security-based swaps on the SBSD's or MSBSP's behalf, and that this questionnaire or application shall serve as the basis for a background check of the associated person to verify that the person is not subject to a statutory disqualification.

See

paragraphs (a)(10)(i) and (b)(8)(i) of Rule 18a-5, as adopted. The Commission is also modifying paragraph (b)(8)(i) of Rule 18a-5 as proposed to eliminate the phrase “whose activities relate to the business of the security-based swap dealer or major security-based swap participant.” As discussed above, the Commission proposed this limitation on the scope of the questionnaire or application for employment to address bank SBSDs and MSBSPs. This limitation is no longer necessary in light of the final rule's limitation to an associated person “who effects or is involved in effecting security-based swaps on the security-based swap dealer's or major security-based swap participant's behalf.”

A commenter also requested that the Commission modify the proposal for foreign SBSDs and MSBSPs so that the questionnaire requirement does not apply to associated persons who effect or are involved in effecting security-based swap transactions with non-U.S. persons or foreign branches.

As noted above, the questionnaire requirement is intended to support the substantive prohibition in Section 15F(b)(6) of the Exchange Act and the related certification and background check requirements in Rule 15Fb6-2. The Commission recognizes, however, as noted by the commenters, that there may be situations in which an SBSD or MSBSP is prohibited by applicable non-U.S. law from receiving, creating, or maintaining records with respect to certain of the information that needs to be recorded pursuant to the questionnaire requirement. Consequently, the Commission has proposed in a separate release additional provisions in Rule 18a-5 that would address situations where the law of a non-U.S. jurisdiction in which an associated person is employed or located may prohibit a stand-alone or bank SBSD or MSBSP from receiving, or creating or maintaining a record of, any of the information mandated by the questionnaire requirement.

See

SIFMA 9/5/2014 Letter.

See Cross-Border Application Proposing Release,

84 FR at 24206.

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

See

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

Liquidity Stress Test

In 2012, the Commission proposed liquidity stress test requirements for entities that are or would be authorized to use internal models to compute net capital; namely, certain stand-alone broker-dealers (“ANC broker-dealers”) as well as certain broker-dealer and stand-alone SBSDs.

Consequently, the Commission proposed that these entities be required to make and keep current certain records relating to the liquidity stress test requirements, if applicable.

The Commission has deferred consideration of the proposed liquidity stress test requirements.

Accordingly, the Commission is deferring consideration of the related recordkeeping requirements.

See Capital, Margin, and Segregation Proposing Release,

77 FR at 70252-54.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25205-06.

See Capital, Margin, and Segregation Adopting Release,

84 FR at 43874.

Paragraph (a)(24) of Rule 17a-3, as proposed; paragraph (a)(11) of Rule 18a-5, as proposed. The proposed recordkeeping requirements would have been set forth in these paragraphs. Since the publication of the recordkeeping and reporting proposing release, a new paragraph (a)(24) has been adopted by the Commission.

See Form CRS Relationship Summary; Amendments to Form ADV,

Exchange Act Release No. 86032 (June 5, 2019), 84 FR 33492, (July 12, 2019); 17 CFR 240.17a-3(a)(24). Paragraph (a)(11) of Rule 18a-5 is being designated as “[Reserved].”

Account Equity and Margin Calculations

The Commission proposed to amend Rule 17a-3 to require broker-dealer SBSDs and MSBSPs to make and keep current a record of the daily calculations that would be required under the proposed margin rule for non-cleared security-based swaps—Rule 18a-3.

The Commission proposed a parallel requirement in Rule 18a-5 for stand-alone SBSDs and MSBSPs. A commenter expressed support for the proposal

and the Commission has adopted Rule 18a-3 requiring the daily calculations.

For the reasons discussed in the proposing release, the

Commission is adopting daily calculation recordkeeping requirements substantially as proposed.

See Recordkeeping and Reporting Proposing Release,

79 FR at 25206-07.

See also Capital, Margin, and Segregation Proposing Release,

77 FR at 70261-63 (proposing Rule 18a-3, requiring, among other things, that nonbank SBSDs perform two daily calculations for each security-based swap account (the equity in the account and a margin amount) and nonbank MSBSPs to perform one daily calculation (the equity in the account)).

See

SIFMA 9/5/2014 Letter.

Capital, Margin, and Segregation Adopting Release,

84 FR at 43909-17.

See

paragraph (a)(25) of Rule 17a-3, as amended; paragraph (a)(12) of Rule 18a-5, as adopted. As proposed, these paragraphs referred to the “amount of equity” in the account and the “margin amount.” Rule 18a-3, as adopted, refers instead to the “current exposure” and “initial margin amount.” Consequently, the paragraphs of the recordkeeping rules as adopted refer to the “current exposure” and “initial margin amount.”

Possession or Control Requirements

The Commission proposed to amend Rule 17a-3 to require broker-dealer SBSDs to make and keep current a record of compliance with the possession or control requirements in the proposed segregation rule for SBSDs—Rule 18a-4.

The Commission proposed a parallel requirement in Rule 18a-5 for stand-alone SBSDs. A commenter supported the proposal

and the Commission has adopted Rule 18a-4 prescribing possession or control requirements.

100

For the reasons discussed in the proposing release, the Commission is adopting the security-based swap possession or control recordkeeping requirements substantially as proposed.

101

See Recordkeeping and Reporting Proposing Release,

79 FR at 25207.

See also Capital, Margin, and Segregation Proposing Release,

77 FR at 70278-82 (proposing Rule 18a-4 requiring, among other things, that SBSDs maintain possession or control over excess securities collateral).

See

SIFMA 9/5/2014 Letter.

100

Capital, Margin, and Segregation Adopting Release,

84 FR at 43930-44.

101

See

paragraph (a)(26) of Rule 17a-3, as amended; paragraphs (a)(13) and (b)(9) of Rule 18a-5, as adopted. The Commission proposed that Rule 18a-4 apply to all SBSDs, but in response to comment adopted security-based swap segregation requirements for broker-dealers, including broker-dealer SBSDs, in the broker-dealer segregation rule, which is codified at 17 CFR 240.15c3-3 (“Rule 15c3-3”). As a result, the Commission is modifying the cross references in paragraph (a)(26) of Rule 17a-3 to reflect the placement of the customer protection requirements for broker-dealer SBSDs in paragraph (p) of Rule 15c3-3 rather than in paragraph (b) of Rule 18a-4 as proposed. Paragraphs (a)(13) and (b)(9) of Rule 18a-5, as adopted, which apply to stand-alone and bank SBSDs, respectively, are not affected by this change.

Customer Reserve Account Requirements

The Commission proposed to amend Rule 17a-3 to require broker-dealer SBSDs to make and keep current a record of security-based swap reserve account computations pursuant to proposed Rule 18a-4.

102

The Commission proposed a parallel requirement in Rule 18a-5 for stand-alone SBSDs. A commenter expressed support for the proposal

103

and the Commission has amended Rule 15c3-3 and adopted Rule 18a-4 to prescribe security-based swap reserve account requirements.

104

For the reasons discussed in the proposing release, the Commission is adopting the security-based swap customer reserve account recordkeeping requirements substantially as proposed.

105

102

See Recordkeeping and Reporting Proposing Release,

79 FR at 25207-08.

103

See

SIFMA 9/5/2014 Letter.

104

Capital, Margin, and Segregation Adopting Release,

84 FR at 43938-42.

105

See

paragraph (a)(27) of Rule 17a-3, as amended; paragraphs (a)(14) and (b)(10) of Rule 18a-5, as adopted. Because the segregation requirements were codified in Rules 15c3-3 and 18a-4, the Commission is modifying the cross references in new paragraph (a)(27) of Rule 17a-3 to new paragraph (p) of Rule 15c3-3 rather than in paragraph (b) of new Rule 18a-4 as proposed. Paragraphs (a)(14) and (b)(10) of Rule 18a-5 are not affected by this change.

Unverified Transactions

It is prudent practice for counterparties to promptly confirm the terms of executed OTC derivatives transactions.

106

The Commission adopted Rule 15Fi-2 to promote this practice. As discussed above, Rule 15Fi-2 requires, among other things, that SBSDs and MSBSPs provide trade acknowledgments containing the details of security-based swap transactions and promptly verify the accuracy of, or otherwise dispute with their counterparties, the terms of trade acknowledgments they receive. To promote compliance with then proposed Rule 15Fi-2 and the risk management practices of SBSDs and MSBSPs, the Commission proposed to amend Rule 17a-3 and include parallel provisions in Rule 18a-5 that would require these entities to make and keep current a record of each security-based swap trade acknowledgment that is not verified within five business days of execution.

107

While the Commission did not prescribe a timeframe for security-based swap trade acknowledgments to be verified, paragraph (e) of Rule 15Fi-2 requires procedures reasonably designed to obtain “prompt verification.”

106

See Trade Acknowledgment and Verification of Security-Based Swap Transactions,

81 FR at 39807.

107

See Recordkeeping and Reporting Proposing Release,

79 FR at 25208.

A commenter urged the Commission not to establish a rigid threshold of five business days and suggested that the Commission “enter into a constructive dialogue with interested constituencies to establish best practices for trade verification.”

108

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

109

108

See

SIFMA 9/5/2014 Letter.

109

See

paragraph (a)(28) of Rule 17a-3, as amended; paragraphs (a)(15) and (b)(11) of Rule 18a-5, as adopted. For the reasons discussed above, the Commission modified the proposed rule text in these paragraphs to replace the requirement to record the “unique counterparty identifier” with the counterparty's UIC.

See

paragraph (a)(28) of Rule 17a-3, as proposed to be amended; paragraphs (a)(15) and (b)(11) of Rule 18a-5, as proposed to be adopted.

Finally, the Commission has previously noted that in complying with the trade acknowledgement and verification requirements, policies and procedures reasonably designed to ensure prompt verification of a transaction may include policies and procedures under which an SBSD or MSBSP relies on its counterparty's negative affirmation to the terms of a trade acknowledgment. The Commission has stated that those policies and procedures generally should require the SBSD or MSBSP to document its counterparty's agreement to rely on negative affirmation.

110

As such, transactions verified by negative affirmation do not need to be recorded as unverified under Rules 17a-3 and 18a-5.

110

See Trade Acknowledgment and Verification of Security-Based Swap Transactions,

81 FR at 39820.

Records Relating to Business Conduct Standards

The Commission has adopted rules to establish business conduct and chief compliance officer requirements for SBSDs and MSBSPs.

111

The

requirements in these rules address (among other things):

111

See

17 CFR 240.15Fh-1 (“Rule 15Fh-1”); 17 CFR 240.15Fh-2 (“Rule 15Fh-2”); 17 CFR 240.15Fh-3 (“Rule 15Fh-3”); 17 CFR 240.15Fh-4 (“Rule 15Fh-4”); 17 CFR 240.15Fh-5 (“Rule 15Fh-5”); 17 CFR 240.15Fh-6 (“Rule 15Fh-6”); 17 CFR 240.15Fk-1 (“Rule 15Fk-1”).

See also Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap

Participants,

Exchange Act Release No. 77617 (Apr. 14, 2016), 81 FR 29960 (May 13, 2016).

• Verification of the status of the counterparty;

• Certain disclosures related to the daily mark and its calculation;

• Disclosures regarding material incentives, conflicts of interest, material risks, and characteristics of the security-based swap, and certain clearing rights;

• Certain “know your counterparty” and suitability obligations for SBSDs;

• Supervisory requirements, including written policies and procedures;

• Certain requirements regarding interactions with special entities;

• Provisions intended to prevent SBSDs from engaging in certain “pay to play” activities; and

• Certain minimum requirements relating to chief compliance officers.

To promote compliance with these then-proposed requirements, the Commission proposed to amend Rule 17a-3 and include parallel provisions in Rule 18a-5 that would require all SBSDs to make and keep current a record that demonstrates their compliance with Rule 15Fh-6 (regarding political contributions by certain SBSDs).

112

In addition, the Commission proposed to amend Rule 17a-3 and include parallel provisions in Rule 18a-5 to require that all SBSDs and MSBSPs make and keep current a record that demonstrates their compliance with Rules 15Fh-1 through 15Fh-5 and Rule 15Fk-1, as applicable.

113

These recordkeeping requirements would require covered firms to keep supporting documents evidencing their compliance with the business conduct and chief compliance officer requirements; a mere attestation of compliance would not be sufficient. To the extent that the rules require providing or receiving written disclosures or written representations, the SBSD or MSBSP would be required to retain a copy of the disclosures or representations.

112

See Recordkeeping and Reporting Proposing Release,

79 FR at 25208.

113

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

A commenter asked the Commission to confirm that the proposed requirements would not create additional recordkeeping obligations with respect to the business conduct standards,

114

particularly with respect to the requirements relating to compliance with such requirements.

115

The commenter also generally stated that the Commission should not adopt additional recordkeeping rules relating to the pay-to-play provisions set forth in the Commission's business conduct release.

116

114

See Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants,

76 FR 42396.

115

See

SIFMA 9/5/2014 Letter.

116

See id. See also Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants,

81 FR 29960.

In response to the commenter's concern, the Commission notes that the proposed recordkeeping requirements were not intended to add additional substantive business conduct or pay-to-play requirements. The relevant substantive requirements are prescribed in the business conduct and pay-to-play rules; the recordkeeping requirements are designed to require records of compliance with those already existing substantive requirements. The Commission acknowledges, however, that they would impose new requirements to

document

a registrant's compliance with several of the substantive business conduct and pay-to-play requirements as well as new requirements to provide written documentation where the business conduct and pay-to-play rules allowed for oral disclosure. These proposed documentation requirements were designed to assist Commission examiners in reviewing compliance with the business conduct and pay-to-play requirements, and the anticipated additional burdens they will impose on registrants are discussed below in Sections IV and V. For these reasons, the Commission is adopting the business conduct standards recordkeeping requirements substantially as proposed.

117

See

paragraph (a)(30) of Rule 17a-3, as amended; paragraphs (a)(17) and (b)(13) of Rule 18a-5, as adopted. For the sake of clarity, the rules as adopted require “[a] record documenting” compliance with the business conduct standards, as opposed to “[a] record that demonstrates” such compliance as proposed. In addition, because Rule 15Fh-6 applies only to SBSDs, and not to MSBSPs, the Commission is removing the proposed reference to MSBSPs in paragraphs (a)(16) and (b)(12) of Rule 18a-5. On October 31, 2018, it issued a statement setting forth the Commission's position that, for a period of five years from the Registration Compliance Date for SBSDs and MSBSPs (as defined in

Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants,

80 FR at 48988 and discussed below in section III.B. of this release), certain actions with respect to specific provisions of the business conduct standards will not provide a basis for a Commission enforcement action.

See Commission Statement on Certain Provisions of Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants,

Exchange Act Release No. 84511 (Oct. 31, 2018), 83 FR 55486 (Nov. 6, 2018) (“

Statement on Business Conduct Standards

”). To the extent SBSDs and MSBSPs rely on the statement, the Commission encourages them to maintain records of the written representations described in the statement until such time as the statement is no longer in force.

b. Additional Amendments to Rule 17a-3 and Modifications to Rule 18a-5

The Commission proposed several amendments to Rule 17a-3 to eliminate obsolete text, improve readability, and modernize terminology. The Commission received no comments addressing these proposed amendments and, as discussed below, is adopting them substantially as proposed.

Reference is made throughout Rule 17a-3 to “members” of a national securities exchange as a distinct class of registrant in addition to “brokers” and “dealers.” The Commission proposed to remove these references to “members” given that the rule applies to brokers-dealers, which would include members of a national securities exchange that are brokers-dealers.

118

The rule being adopted does not remove these references to “members” to avoid confusion as to whether their removal resulted in a substantive change to the rule.

118

See Recordkeeping and Reporting Proposing Release,

79 FR at 25209.

The Commission is adopting a global change to replace the word “shall” in the rule with the word “must” or “will” where appropriate.

119

Similarly, when defining terms, the Commission is replacing the phrase “shall mean” with the word “means.”

120

The Commission is also adopting certain stylistic, corrective, and punctuation amendments to improve the rule's readability.

121

The Commission is

simplifying the text in paragraph (a) of Rule 17a-3 to state that Rule 17a-3 applies to “every broker or dealer,” since the newly adopted undesignated introductory paragraph already provides sufficient detail as to the types of registrants to which the rule applies.

122

In recognition of the fact that broker-dealers may execute orders for non-customers, the Commission is amending paragraph (a)(6) of Rule 17a-3 to specify that a broker-dealer must maintain a copy of the customer's

or non-customer's

subscription agreement.

123

119

The amendments replace the word “shall” with the word “must” or “will” in the following paragraphs of Rule 17a-3, as amended: (a) Introductory text, (a)(6)(i)(A), (a)(7)(i), (a)(10) and (11), (a)(12)(i), (a)(16)(ii), (a)(17)(i), (a)(18)(i), (a)(19)(i), (b), (d), (e), and (f).

120

The amendments replace the phrase “shall mean” with the word “means” in the following paragraphs of Rule 17a-3, as amended: (a)(6)(i)(A) and (a)(16)(ii)(A) and (B).

121

The Commission is adopting the following stylistic and corrective changes to Rule 17a-3, as amended: (1) Adding to paragraph (a)(1) the phrase “such securities were”; (2) adding to paragraph (a)(4)(vi) the word “and” after the semicolon; (3) replacing the word “of” with the word “or” in paragraph (a)(5), resulting in the phrase “for its account

for the account of its customers or partners”; (4) replacing the phrase “purchase or sale of securities” with the phrase “purchase or sale of a security” in the first sentence of paragraph (a)(6)(i); (5) replacing the word “and” with the word “or” in paragraph (a)(7), resulting in the phrase “A memorandum of each purchase

sale”; (6) replacing the phrase “in respect of” with the phrase “with respect to” in paragraph (a)(9); (7) adding the phrase “, as applicable:” After the word

“indicating” in paragraph (a)(9); (8) including the word “and” between the second-to-last and last subparagraphs of paragraph (a)(9) (instead of after every subparagraph); (9) replacing cross-reference in paragraph (a)(12) to “paragraph (h)(4)” with a cross-reference to “paragraph (f)(4)” due to the proposed deletion of two paragraphs; (10) amending paragraph (a)(12)(i)(G) to refer to a “broker or dealer” instead of a “broker-dealer”; (11) replacing the superfluous “or” with a comma in the phrase “wrongful taking of property or bribery” in paragraph (a)(12)(i)(G); (12) clarifying in paragraph (a)(1) that the unit and aggregate purchase or sale price, if any includes the financial terms for security-based swaps; (13) replacing “,” with “;” after the phrase “a notation of that entry” in paragraph (a)(6)(i)(A) for consistency with 17 CFR 240.17a-3(a)(6)(i)(A) and paragraph (b)(4) of Rule 18a-5, as adopted; (14) replacing “In the case of” with “For each” in paragraph (a)(9)(iv) for consistency with paragraphs (a)(7) and (b)(7) of Rule 18a-5, as adopted; (15) adding quotation marks around the term “associated person” in paragraph (a)(12)(i) for consistency with paragraph (a)(12)(i) of Rule 17a-3 and paragraphs (a)(10)(i) and (b)(8)(i) of Rule 18a-5, as adopted; (16) replacing “or any broker or dealer” with “, or any broker, dealer, security-based swap dealer or major security-based swap participant” in paragraph (a)(12)(i)(F) for consistency with paragraphs (a)(10)(i)(F) and (b)(8)(i)(F) of Rule 18a-5, as adopted; (17) adding “, or” after the phrase “wrongful taking of property” in paragraph (a)(12)(i)(G) for consistency with paragraph (a)(12)(i)(G) of Rule 17a-3 and paragraphs (a)(10)(i)(G) and (b)(8)(i)(G) of Rule 18a-5, as adopted; (18) replacing “17 CFR 240.17a-3” with “this section” in paragraph (b)(v); and (19) replacing “§§ 240.17a-3 and 17a-4” with “this section and § 240.17a-4” in paragraph (b).

122

See

undesignated introductory paragraph of Rule 17a-3, as amended.

123

See

paragraph (a)(6) of Rule 17a-3, as amended.

The Commission is restructuring paragraph (a)(11) of Rule 17a-3 to eliminate paragraphs (a)(11)(i) and (ii).

124

Under these amendments, the text formerly located in paragraph (a)(11)(i) of Rule 17a-3 is set forth in the second sentence of paragraph (a)(11) of Rule 17a-3, as amended, and the text of paragraph (a)(11)(ii) has been deleted from the rule. The Commission proposed to amend the “Provided, however” paragraph in paragraph (a)(12) of Rule 17a-3 that follows paragraph (a)(12)(i)(H) by replacing the list of entities enumerated in the paragraph with the term “a self-regulatory organization.”

125

The Commission is amending the paragraph substantially as proposed but adding the phrase “a registered national securities association or a registered national securities exchange” rather than the term “a self-regulatory organization” in order to more accurately reflect the nature of the entities listed in the paragraph prior to these amendments. The Commission is also redesignating this paragraph as paragraph (a)(12)(i)(I) of Rule 17a-3.

124

See

paragraph (a)(11) of Rule 17a-3, as amended.

125

See

paragraph (a)(12) of Rule 17a-3, as amended.

As discussed in more detail in section II.E.1. of this release, the Commission is adopting a limited alternative compliance mechanism in Rules 17a-3 and 18a-5.

126

The provisions of the limited alternative compliance mechanism are in paragraph (b) of Rule 17a-3 and in paragraph (c) of Rule 18a-5. As a result, the Commission is redesignating paragraphs (b) through (g) of Rule 17a-5 as paragraphs (c) through (g) and is redesignating proposed paragraph (c) of Rule 18a-5 as paragraph (d).

126

See

paragraph (b) of Rule 17a-3, as amended; paragraph (c) of Rule 18a-5, as adopted.

The Commission also is amending paragraph (b) of Rule 17a-3 (and, as mentioned above, is redesignating it as paragraph (c)). Paragraph (b)(1) was designed to avoid duplication so that an introducing broker-dealer will not be required to make and keep current the same records that would customarily be made by the firm's clearing broker-dealer. However, the language in paragraph (b)(1) beginning with the phrase “

Provided,

That” is outdated insofar is it references a capital standard that has been superseded, and the Commission is deleting it accordingly. In revising paragraph (b)(1), the intent of the provision—to avoid the duplicative creation of records related to transactions introduced by one broker or dealer and cleared by a different broker or dealer—remains the same. However, the Commission is eliminating the outdated capital standard reference.

127

The Commission is also deleting paragraph (b)(2), as it would be redundant of paragraph (b) of Rule 17a-3, as amended.

127

Paragraph (c) of Rule 17a-3, as amended, provides that a broker or dealer registered pursuant to Section 15 of the Act, that introduces accounts on a fully-disclosed basis, is not required to make or keep such records of transactions cleared for such broker or dealer as are made and kept by a clearing broker or dealer pursuant to the requirements of §§ 240.17a-3 and 240.17a-4. Nothing herein will be deemed to relieve such broker or dealer from the responsibility that such books and records be accurately maintained and preserved as specified in §§ 240.17a-3 and 240.17a-4.

The Commission is deleting paragraphs (c) and (d) of Rule 17a-3. Paragraph (c) references instruments such as U.S. Defense Savings Stamps and U.S. Defense Savings Bonds that are no longer widely circulated and thus a specific carve-out for these instruments from the general rule set forth in paragraph (a) of Rule 17a-3 is no longer appropriate.

128

Paragraph (d) provides a

de minimis

exception from paragraph (a) of Rule 17a-3 for any cash transaction of $100 or less involving only subscription rights or warrants which by their terms expire within 90 days after their issuance. This exception was adopted in 1953 to reduce the burden and expense of making accounting entries for these transactions. The burden associated with these accounting entries is no longer significant in light of the technological advances in recordkeeping systems since 1953.

129

In addition, the removal of this exception will affect only a small number of transactions. As a consequence of the removal of paragraphs (c) and (d) from Rule 17a-3, paragraphs (e), (f), (g), and (h) are being redesignated as paragraphs (d), (e), (f), and (g), respectively.

128

The Defense Savings Bond initiated by the U.S. Treasury and the U.S. Defense Savings Stamps introduced by the U.S. Postal Service were measures to finance the U.S. effort in World Wars I and II. The bonds matured in 10 years from the date of issuance. The Defense Savings Bonds were replaced by Series E savings bonds, which ceased to be issued as of June 1980. Today, these instruments are not widely held and are valued more as collectibles than for their face value.

See

information

available at www.treasurydirect.gov.

129

See Preservation of Records and Reports of Certain Stabilizing Activities,

18 FR 2879 (May 19, 1953) (“It has been pointed out to the Commission that the accounting entries appropriate in the case of the usual securities transaction are unnecessarily burdensome and expensive as to these rights transactions because of the small sums involved and because in many cases there is no continuing relationship between the customer and the firm”).

Paragraph (e) of Rule 17a-3 references Municipal Securities Rulemaking Board (“MSRB”) Rule G-8 and states that compliance with that rule will be deemed to be compliance with this section. The Commission is adding the phrase “or any successor rule” to the reference to Rule G-8 so that the reference does not become superseded over time.

The Commission also made a number of non-substantive modifications to the text of Rule 18a-5 in addition to the modifications discussed above in section II.A.2.a. of this release.

130

In particular, the Commission made the following changes to Rule 18a-5, as adopted: (1) Removing “such” from the phrase “Each such

security-based swap dealer” in paragraph (a) for consistency with paragraph (b) of Rule 18a-5, as adopted; (2) replacing “if any contract price” with “if any (including the financial terms for security-based swaps)” in paragraph (a)(1) for consistency with paragraph (b)(1) of Rule 18a-5, as adopted; (3) adding “such securities were” before the phrase “purchase or received or to whom sold or delivered” in paragraphs (a)(1) and (b)(1) for consistency with paragraph (a)(1) of Rule 17a-3, as amended; (4) replacing “purchase or sale” with “transactions” in the third sentence of paragraphs (a)(1) and (b)(1) for consistency with paragraph (a)(1) of Rule 17a-3, as amended; (5) replacing “the termination or maturity date” with “the scheduled termination date” in paragraphs (a)(1), (3), and (5) and (b)(1), (2), and (4) for consistency with paragraph (a)(1) of Rule 17a-3, as amended; (6) replacing the phrase “the notional amount” with “the notional amount(s) and the currenc(ies) in which the notional amount(s) is expressed” in paragraphs (a)(1), (3), and (5) and (b)(1), (2), and (4) for consistency with paragraph (a)(1) of Rule 17a-3, as amended; (7) adding “counterparty's” before the phrase “legal entity identifier” in paragraphs (a)(1), (3), (5), and (15) and (b)(1), (2), (4), and (11) for consistency with paragraph (a)(1) of Rule 17a-3, as amended; (8) removing “,” after “expense” in paragraph (a)(2) for consistency with paragraph (a)(2) of Rule 17a-3, as amended; (9) adding “(including security-based swaps) after the phrase “deliveries of securities” in paragraphs (a)(3) and (b)(2) for consistency with paragraph (a)(3) of Rule 17a-3, as amended; (10) replacing “,” with “;” after the phrase “all other debits and credits to such account” in paragraph (a)(3) for consistency with paragraph (a)(3) of Rule 17a-3, as amended; (11) replacing “in the case of security-based swap” with “for a security-based swaps” in paragraph (a)(3) for consistency with paragraph (a)(3) of Rule 17a-3, as amended, and paragraph (b)(2) of Rule 18a-5, as adopted; (12) removing “ledger accounts (or other records) itemizing separately,” in paragraph (a)(3) for consistency with paragraph (a)(3) of Rule 17a-3, as amended, and paragraph (b)(2) of Rule 18a-5, as adopted; (13) replacing “subject” with “subjects” in paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as adopted; (14) adding “for” before the phrase “the account of its customers” in paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as adopted; (15) replacing “locations” with “location” in paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as adopted; (16) removing the “,” after the phrase “in all cases” in paragraph (a)(4)(i) for consistency with paragraph (a)(5)(i) of Rule 17a-3, as amended, and paragraph (b)(3)(i) of Rule 18a-5, as adopted; (17) replacing “§ 240.15Fi-1” with “§ 240.15Fi-2” in paragraphs (a)(6) and (15) and (b)(11) to reflect a change in reference; (18) replacing “security-based swap dealer, major security-based swap participant” with “security-based swap dealer or major security-based swap participant” in paragraphs (a)(10)(ii) and (b)(8)(ii) for grammatical correctness and internal consistency; (19) removing “,” after “§ 240.15Fh-5” in paragraph (a)(17) for consistency with paragraph (a)(30) of Rule 17a-3, as amended, and paragraph (b)(13) of Rule 18a-5, as adopted; (20) replacing “a security-based swap dealer or a major security based swap participant” with “such” in paragraph (b)(1) for clarity; (21) replacing “if any (includes the contract price for security-based swaps)” with “(if any, including the financial terms for security-based swaps)” in paragraph (b)(1) for consistency with paragraph (a)(1) of Rule 17a-3, as amended; (22) replacing “and in addition, for security-based swaps” with “and in addition, for a security-based swap” in paragraph (b)(2) for consistency with paragraph (a)(3) of Rule 17a-3, as amended, and paragraph (a)(3) of Rule 18a-5, as adopted; (23) replacing “the time of cancellation, if applicable” with “the time of execution or cancellation” in paragraph (b)(4) for consistency with paragraph (a)(6)(i)(A) in Rule 17a-3, as adopted; (24) changing the fourth sentence in paragraph (b)(4) to read “An order entered pursuant to the exercise of discretionary authority by the security-based swap dealer or major security-based swap participant, or associated person thereof, must be so designated.” for consistency with paragraph (a)(6)(i)(A) in Rule 17a-3, as adopted; (25) adding a citation to 15 U.S.C. 78c(a)(70) to paragraph (c)(1) for internal consistency; (26) replacing “The term, as to a person supervised by a prudential regulator,” in paragraph (c)(2) with “The term

associated person,

as to an entity supervised by a prudential regulator” to clarify that the term referenced in the paragraph is “associated person”; (27) adding parentheses around the phrase “if any, including the financial terms for security-based swaps” in paragraph (b)(1) for consistency with paragraph (a)(1) of Rule 17a-3, as amended; (28) replacing “will” with “does” in paragraph (h)(4) of Rule 17a-3, as amended, for consistency with Section 3(a)(70) of the Exchange Act; and (29) consolidating paragraphs (a)(19) and (b)(15) and designating it paragraph (c) and redesignating paragraph (c) as paragraph (d).

3. Record Maintenance and Preservation Requirements

Rule 17a-4 requires a broker-dealer to preserve certain types of records if it makes or receives them. The rule also prescribes the time period that these records and the records required to be made and kept current under Rule 17a-3 must be preserved and the manner in which they must be preserved. The Commission is adopting amendments to Rule 17a-4 that are designed to account for the security-based swap activities of broker-dealers, including broker-dealer SBSDs and MSBSPs.

131

The Commission also is adopting a number of largely technical amendments to Rule 17a-4. The Commission is adopting Rule 18a-6—which is modeled on Rule 17a-4, as amended—to establish record maintenance and preservation requirements for stand-alone and bank SBSDs and MSBSPs. Rule 18a-6 does not include a parallel requirement for every requirement in Rule 17a-4.

132

In addition, the recordkeeping requirements in Rule 18a-6 applicable to bank SBSDs and MSBSPs are more limited in scope than the requirements in the rule applicable to stand-alone SBSDs and MSBSPs.

131

Broker-dealer SBSDs and MSBSPs are subject to all the record maintenance and preservation requirements applicable to broker-dealers under Rule 17a-4, as amended, plus the additional requirements specifically applicable only to SBSDs and MSBSPs.

132

The Commission did not propose to include in Rule 18a-6 requirements that would parallel the requirements in paragraphs (b)(11), (g), (h), (k), and (l) of Rule 17a-4, as amended. These requirements relate to activities that would not be relevant to stand-alone SBSDs or MSBSPs. Other requirements in Rule 17a-4, as amended, not included as parallel requirements in Rule 18a-6, as adopted, are discussed below.

a. Rule 17a-4 and Rule 18a-6

Undesignated Introductory Paragraph

The Commission proposed adding an undesignated introductory paragraph to Rule 17a-4 explaining that the rule applies to a broker-dealer, including a broker-dealer SBSD or MSBSP, while a stand-alone or bank SBSD or MSBSP is subject to Rule 18a-6.

133

Similarly, the Commission proposed an undesignated introductory paragraph to Rule 18a-6 explaining that the rule would apply to a stand-alone or bank SBSD or MSBSP, while a broker-dealer SBSD or MSBSP is subject to Rule 17a-4. The Commission received no comments on the proposed undesignated introductory paragraphs to Rules 17a-4 and 18a-6 and is adopting them with non-substantive modifications to clarify which rule (17a-4 or 18a-6) applies to a given type of entity.

134

133

See Recordkeeping and Reporting Proposing Release,

79 FR at 25211.

134

See

undesignated introductory paragraph of Rule 17a-4, as amended; undesignated introductory paragraph of Rule 18a-6, as adopted.

Six Year Preservation Requirement for Certain Rule 17a-3 and Rule 18a-5 Records

Paragraph (a) of Rule 17a-4 provides that brokers-dealers subject to Rule 17a-3 must preserve for a period of not less than six years, the first two years in an easily accessible place, certain categories of records required to be made and kept current under Rule 17a-3 (the “six year preservation requirement”).

135

Consequently, under this existing requirement, broker-dealer SBSDs and MSBSPs are required to preserve for six years the same categories of records as stand-alone broker-dealers. As discussed above, paragraphs (a) and (b) of Rule 18a-5 contain certain recordkeeping requirements that parallel existing requirements in Rule 17a-3, as amended. Under these parallel requirements, stand-alone and bank SBSDs and MSBSPs must make and keep current certain categories of records that broker-dealers must maintain pursuant to the six year preservation requirement in Rule 17a-4. Consequently, as proposed, paragraphs (a)(1) and (2) of Rule 18a-6 would require that these categories of records must be preserved for a period of not less than six years, the first two years in an easily accessible place.

136

The Commission received no comments on

paragraphs (a)(1) and (2) of proposed Rule 18a-6 and is adopting them as proposed.

137

135

Specifically, the six-year preservation requirement applies to records required under paragraphs (a)(1) through (3), (5), (21), and (22) of Rule 17a-3, as amended.

136

See Recordkeeping and Reporting Proposing Release,

79 FR at 25211-12.

137

See

paragraphs (a)(1) and (2) of Rule 18a-6, as adopted.

Three Year Preservation Requirement for Certain Rule 17a-3 and Rule 18a-5 Records

Paragraph (b)(1) of Rule 17a-4 provides that broker-dealers subject to Rule 17a-3 must preserve for at least three years, the first two years in an easily accessible place, certain records required to be made and kept current under Rule 17a-3 (the “three year preservation requirement”).

138

The Commission did not propose to amend or change any of the existing cross-references to Rule 17a-3 in paragraph (b)(1) of Rule 17a-4. The Commission did, however, propose adding cross-references to certain new paragraphs that are being added to Rule 17a-3 to address security-based swap activities of broker-dealers, including broker-dealer SBSDs and MSBSPs.

139

As discussed above, paragraphs (a) and (b) of Rule 18a-5 require stand-alone and bank SBSDs and MSBSPs make and keep current certain categories of records that broker-dealers must maintain pursuant to the three year preservation requirement, as amended to incorporate the new records relating to security-based swap activities. Consequently, as proposed, paragraphs (b)(1) and (2) of Rule 18a-6 would similarly require that these categories of records be preserved for a period of not less than three years, the first two years in an easily accessible place. The Commission received no comments on these proposed preservation requirements and is adopting them substantially as proposed.

140

138

Specifically, paragraph (b)(1) of Rule 17a-4 applies the three-year preservation requirement to the records required to be made and kept current under paragraphs (a)(4), (6) through (10), (16), and (18) through (20) and (e) of Rule 17a-3, as amended. Prior to these amendments, Rule 17a-4 did not cross-reference paragraph (a)(11) of Rule 17a-3. The Commission is correcting this omission by adding a cross reference to paragraph (a)(11) of Rule 17a-3 in paragraph (b)(1) of Rule 17a-4, as amended. This requires broker-dealers to preserve these records for three years, the first two years in an easily accessible place. Based on staff experience, the Commission believes that broker-dealers have been preserving these records in a manner consistent with this requirement.

139

See Recordkeeping and Reporting Proposing Release,

79 FR at 25212.

140

See

paragraph (b)(1) of Rule 17a-4, as amended; paragraphs (b)(1) and (2) of Rule 18a-6, as adopted. The Commission is adopting the following stylistic and corrective changes: (1) Removing the reference to paragraph (a)(24) of Rule 17a-3 since that paragraph is not being adopted as proposed; (2) replacing “made pursuant to paragraphs § 240.18a-5(a)(1), (a)(2), (a)(3), and (a)(4)” with “made pursuant to § 240.18a-5(a)(1) through (4)” in paragraph (a)(1) of Rule 18a-6, as adopted, for grammatical correctness; (3) replacing “made pursuant to paragraphs § 240.18a-5(b)(1), (b)(2), and (b)(3)” with “made pursuant to § 240.18a-5(b)(1) through (3)” in paragraph (a)(2) of Rule 18a-6, as adopted, for grammatical correctness; (4) replacing “;” with “.” for each paragraph in Rule 18a-6, as adopted, for internal consistency; (5) removing “as applicable” in paragraph (b)(1)(viii) of Rule 18a-6, as adopted, as it is not necessary since only Part II is referenced in Rule 18a-6, as adopted; (6) replacing “security-based swap customers” with “non-security-based swap customers” in paragraph (b)(1)(viii)(B) of Rule 18a-6, as adopted, to correct an error and for consistency with paragraph (b)(8)(ii) of Rule 17a-4, as amended; (7) removing “,” after “cost” in paragraph (b)(1)(viii)(H) of Rule 18a-6, as adopted, for consistency with paragraph (b)(8)(ix) of Rule 17a-4, as amended; (8) removing “;” after “and” in paragraph (b)(1)(viii)(N) of Rule 18a-6, as adopted, for consistency with paragraph (b)(8)(xvi) of Rule 17a-4, as amended; (9) removing “Records which contain” in paragraph (b)(2)(v) of Rule 18a-6, as adopted, for clarity; and (10) replacing “; and” with “.” in paragraph (b)(2)(vii) of Rule 18a-6, as adopted, for internal consistency.

Three Year Preservation Requirement for Certain Other Records

Paragraphs (b)(2) through (13) of Rule 17a-4 also provide that a broker-dealer subject to Rule 17a-3 must preserve for a period of not less than three years, the first two years in an easily accessible place, other categories of records if the broker-dealer makes or receives the record. These are not categories of records a broker-dealer is required to make and keep current under Rule 17a-3 but rather types of records that a broker-dealer may make or receive in the ordinary course of business. As discussed in more detail below, the Commission proposed to amend certain of the provisions in paragraphs (b)(2) through (13) of Rule 17a-4 to account for security-based swaps and to require that broker-dealers, including broker-dealer SBSDs and MSBSPs, preserve certain additional records related to security-based swap activities.

141

Further, as discussed below, the Commission proposed requirements in paragraph (b) of Rule 18a-6 that would require stand-alone and bank SBSDs and MSBSPs to preserve similar records.

141

See Recordkeeping and Reporting Proposing Release,

79 FR at 25212-13.

In addition, the categories of records identified in paragraphs (b)(3) through (5) and (7) of Rule 17a-4 must be retained only if they relate to the broker-dealer's

business as such

(

i.e.,

business as a broker-dealer). Security-based swap activities of a broker-dealer that is not registered as an SBSD or MSBSP are part of the broker-dealer's business as such for the purposes of Rule 17a-4 just like activities relating to other types of securities. In the case of a broker-dealer SBSD or MSBSP, the Commission proposed to amend Rule 17a-4 to clarify that the business as such of these entities would include the firm's business as an SBSD or MSBSP.

142

The Commission received no comment on the proposed definition and is adopting it substantially as proposed.

143

142

See Recordkeeping and Reporting Proposing Release,

79 FR at 25213.

143

See

paragraph (m)(5) of Rule 17a-4, as amended. The definition as adopted is shorter than proposed to improve clarity and now reads: “[t]he term

business as such

includes security-based swap activity.”

Bank Records

Paragraph (b)(2) of Rule 17a-4 requires a broker-dealer, including a broker-dealer SBSD or MSBSP, to preserve all check books, bank statements, cancelled checks, and cash reconciliations. The Commission did not propose to amend this paragraph to specifically account for security-based swaps. However, the Commission did propose a parallel requirement in Rule 18a-6 applicable to stand-alone SBSDs and MSBSPs.

144

The Commission received no comments on this proposed bank record preservation requirement and is adopting it as proposed.

145

144

See Recordkeeping and Reporting Proposing Release,

79 FR at 25213.

145

See

paragraph (b)(1)(ii) of Rule 18a-6, as adopted.

Bills

Paragraph (b)(3) of Rule 17a-4 requires a broker-dealer, including a broker-dealer SBSD or MSBSP, to preserve all bills receivable or payable, paid or unpaid, relating to the business of the broker-dealer. The Commission proposed a parallel requirement in Rule 18a-6 that would require stand-alone SBSDs and MSBSPs to preserve these types of bills.

146

The Commission received no comments on this proposed bill preservation requirement and is adopting it as proposed.

147

146

See Recordkeeping and Reporting Proposing Release,

79 FR at 25213.

147

See

paragraph (b)(1)(iii) of Rule 18a-6, as adopted.

Communications

Paragraph (b)(4) of Rule 17a-4 requires a broker-dealer, including a broker-dealer SBSD or MSBSP, to preserve originals of all communications received and copies of all communications sent (and any approvals thereof) by the broker-dealer (including inter-office memoranda and communications) relating to its business as such, including all communications which are subject to the rules of a self-regulatory organization (“SRO”) of which the broker-dealer is a member regarding communications with the

public.

148

The term “communications,” as used in paragraph (b)(4) of Rule 17a-4, includes all electronic communications (

e.g.,

emails and instant messages).

149

Communications related to security-based swap activities would be communications relating to the business as such of a broker-dealer, including a broker-dealer SBSD and MSBSP.

148

Paragraph (b)(4) of Rule 17a-4 further provides that the term

communications

as used in the paragraph includes sales scripts.

149

See, e.g., Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples Under the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940,

Exchange Act Release No. 37182 (May 9, 1996), 61 FR 24644 (May 15, 1996), at n. 32;

Reporting Requirements for Brokers or Dealers Under the Securities Exchange Act of 1934,

Exchange Act Release No. 38245 (Feb. 5, 1997), 62 FR 6469 (Feb. 12, 1997);

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, 55825 (Nov. 2, 2001).

The Commission had not previously interpreted the term “communications” to include telephonic communications. However, Section 15F(g)(1) of the Exchange Act provides that each registered SBSD and MSBSP shall maintain daily trading records of the security-based swaps of the registered SBSD or MSBSP and all related records (including related cash or forward transactions) and recorded communications, including electronic mail, instant messages, and

recordings of telephone calls,

for such period as may be required by the Commission by rule or regulation. Therefore, to implement Section 15F(g)(1) of the Exchange Act, the Commission proposed amendments to the preservation requirement in paragraph (b)(4) of Rule 17a-4 to require recordings of telephone calls required to be maintained pursuant to Section 15F(g)(1) of the Exchange Act.

150

Under this requirement, a broker-dealer SBSD or MSBSP would be required to preserve for three years telephone calls that it records to the extent the recordings are required to be maintained pursuant to Section 15F(g)(1). The Commission proposed communication preservation requirements for stand-alone and bank SBSDs and MSBSPs that would parallel those in Rule 17a-4, as proposed to be amended, to further implement Section 15F(g)(1). The provision applicable to bank SBSDs and MSBSPs would limit the requirement to communications that relate to the business of an SBSD or MSBSP.

150

See Recordkeeping and Reporting Proposing Release,

79 FR at 25213-14.

The Commission emphasizes that the Section 15(g)(1) of the Exchange Act and the new rules requiring the

retention

of telephone calls do not establish requirements to

record

telephone calls. Instead, the rules require firms to retain recordings of telephone calls that are within the scope of Section 15(g)(1) of the Exchange Act. Thus, if the firm records a telephone call voluntarily or for some other reason, it will need to retain the recording if the call falls within the scope of Section 15(g)(1) of the Exchange Act. However, a firm's decision not to record a telephone call that falls within the scope of Section 15(g)(1) of the Exchange Act will not implicate these new retention requirements.

A commenter urged the Commission to apply a one-year retention requirement as was adopted by the CFTC with respect to retaining recordings of telephone calls.

151

In response, the Commission notes that applying the three-year retention requirement to these recordings is designed to allow staff examiners access to records they may need to review the past activities of SBSDs and MSBSPs, given that examinations are conducted using a risk-based program. In addition, the Commission believes that a three-year retention period will benefit counterparties in that it will preserve information that may help support them if, for example, a dispute arises about a transaction with an SBSD or MSBSP. A three-year retention period also is consistent with the retention period applicable to the vast majority of broker-dealer records, as compared to a one year period. Further, although the CFTC requires registrants to make and keep records of

all

oral communications pertaining to pre-execution trade information, including telephone calls, the Commission's record retention rule applies only to

recordings

of telephone calls,

i.e.,

those voluntarily made by the registrant.

152

The Commission is adopting the communications preservation requirements as proposed.

153

151

See

SIFMA 9/5/2014 Letter.

152

See

17 CFR 23.202(a)(1) (requiring CFTC-registered swap dealers and major swap participants to “make and keep pre-execution trade information, including, at a minimum, records of all oral and written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading, and prices, that lead to the execution of a swap, whether communicated by telephone . . .”).

153

See

paragraph (b)(4) of Rule 17a-4, as amended; paragraphs (b)(1)(iv) and (b)(2)(ii) of Rule 18a-6, as adopted.

Trial Balances

Paragraph (b)(5) of Rule 17a-4 requires a broker-dealer, including a broker-dealer SBSD or MSBSP, to preserve all trial balances, computations of aggregate indebtedness and net capital (and working papers in connection therewith), financial statements, branch office reconciliations, and internal audit working papers relating to the firm's business as a broker-dealer. The Commission proposed including a parallel requirement in Rule 18a-6 applicable to stand-alone SBSDs and MSBSPs.

154

In contrast to Rule 17a-4, the provision in Rule 18a-6, as proposed, did not refer to computations of “aggregate indebtedness” because the proposed capital rules for stand-alone SBSDs and MSBSPs—Rules 18a-1 and 18a-2, respectively—did not include such a calculation.

155

Further, to account for the capital standard for stand-alone MSBSPs, the proposed requirement referred to tangible net worth.

156

The Commission received no comments on the proposal and adopted Rules 18a-1 and 18a-2.

157

Consequently, the Commission is adopting the trial balance preservation requirements as proposed.

158

154

See Recordkeeping and Reporting Proposing Release,

79 FR at 25214.

155

See Capital, Margin, and Segregation Proposing Release,

77 FR at 70221-29.

156

See Capital, Margin, and Segregation Proposing Release,

77 FR at 70256-57. A broker-dealer MSBSP is subject to the net capital requirements in Rule 15c3-1.

157

See Capital, Margin, and Segregation Adopting Release,

84 FR at 44052-68.

158

See

paragraph (b)(1)(v) of Rule 18a-6, as adopted.

Account Documents

Paragraph (b)(6) of Rule 17a-4 requires a broker-dealer, including a broker-dealer SBSD or MSBSP, to preserve all guarantees of accounts and all powers of attorney and other evidence of the granting of any discretionary authority given in respect of any account as well as copies of resolutions empowering an agent to act on behalf of a corporation. The Commission proposed parallel requirements in Rule 18a-6 for stand-alone and bank SBSDs and MSBSPs to preserve similar types of records, but only with respect to security-based swap accounts.

159

For example, bank SBSDs and MSBSPs would not be required to maintain these records with respect to accounts involving exclusively banking related services. The Commission received no comments on the proposed account documentation

preservation requirements and is adopting them as proposed.

160

159

See Recordkeeping and Reporting Proposing Release,

79 FR at 25214.

160

See

paragraphs (b)(1)(vi) and (b)(2)(iii) of Rule 18a-6, as adopted.

Written Agreements

Paragraph (b)(7) of Rule 17a-4 requires a broker-dealer, including a broker-dealer SBSD or MSBSP, to preserve all written agreements (or copies thereof) entered into by the firm relating to its business as such, including agreements with respect to any account. The Commission proposed to amend this paragraph to require the preservation of written agreements with respect to a security-based swap customer or non-customer—including governing documents or any document establishing the terms and conditions of security-based swaps of the customer or non-customer—with the account records of the customer or non-customer.

161

The Commission proposed parallel requirements in Rule 18a-6 for stand-alone and bank SBSDs and MSBSPs. The provision applicable to bank SBSDs and MSBSPs would limit the preservation requirement to written agreements relating to the registrant's business as an SBSD or MSBSP. The Commission received no comments on the proposed written agreement preservation requirements and is adopting them substantially as proposed.

162

161

See Recordkeeping and Reporting Proposing Release,

79 FR at 25214.

162

See

paragraph (b)(7) of Rule 17a-4, as amended; paragraphs (b)(1)(vii) and (b)(2)(iv) of Rule 18a-6, as adopted. The Commission is adopting the following stylistic and corrective changes: (1) Replacing “;” with “.” for each paragraph in Rule 18a-6 for internal consistency; (2) removing “as applicable” in paragraph (b)(1)(viii) of Rule 18a-6, as adopted, as it is not necessary since only Part II is referenced in Rule 18a-6, as adopted; (3) replacing “security-based swap customers” with “non-security-based swap customers” in paragraph (b)(1)(viii)(B) of Rule 18a-6, as adopted, to correct an error and for consistency with paragraph (b)(8)(ii) of Rule 17a-4, as amended; (4) removing “,” after “cost” in paragraph (b)(1)(viii)(H) of Rule 18a-6, as adopted, for consistency with paragraph (b)(8)(ix) of Rule 17a-4, as amended; (5) removing “;” after “and” in paragraph (b)(1)(viii)(N) of Rule 18a-6, as adopted, for consistency with paragraph (b)(8)(xvi) of Rule 17a-4, as amended; (6) removing “Records which contain” in paragraph (b)(2)(v) of Rule 18a-6, as adopted, for clarity; (7) replacing “; and” with “.” in paragraph (b)(2)(vii) of Rule 18a-6, as adopted, for internal consistency.

Information Supporting Financial Reports

Paragraphs (b)(8)(i) through (xv) of Rule 17a-4 require a broker-dealer, including a broker-dealer SBSD or MSBSP, to preserve records containing various types of information that support amounts included in the broker-dealer's FOCUS Report prepared as of the broker-dealer's audit date and amounts in the annual audited financial statements the broker-dealer is required to file under Rule 17a-5 or 17a-12, as applicable. The paragraphs specifically identify the types of supporting information that must be preserved, including money balances, securities positions (which will include security-based swap positions), futures positions, commodity positions, and options positions, among other things.

The Commission proposed to: (1) Amend certain of these paragraphs to require the preservation of the same type of supporting information required of commodity positions, but for swap positions; (2) add a paragraph to require a broker-dealer SBSDs to preserve records that contain detail relating to the calculation of the risk margin amount under the proposed SBSD capital rules; and (3) add a new paragraph to require broker-dealer SBSDs to preserve records containing detail relating to the possession or control requirements in the proposed SBSD segregation rule.

163

The Commission proposed requirements in Rule 18a-6 for stand-alone SBSDs and MSBSPs that paralleled the requirements in paragraphs (b)(8)(i) through (xv) of Rule 17a-4, as proposed to be amended. Finally, the Commission proposed that bank SBSDs preserve records containing detail relating to the possession or control requirements in the proposed SBSD segregation rule (but not any of the other preservation requirements). The Commission received no comments on these proposals and has adopted the SBSD capital rules requiring a risk margin amount calculation and the SBSD segregation rules prescribing a possession or control requirement.

164

Consequently, the Commission is adopting the information supporting financial statement preservation requirements substantially as proposed.

165

163

See Recordkeeping and Reporting Proposing Release,

79 FR at 25214-16.

See Capital, Margin, and Segregation Proposing Release,

77 FR at 70221-24, 70278-82 (discussing the proposed risk margin amount and possession or control requirements respectively).

164

See Capital, Margin, and Segregation Adopting Release,

84 FR at 43883-86 (risk margin amount calculation), 43935-38 (possession or control requirement).

165

See

paragraph (b)(8) of Rule 17a-4, as amended; paragraphs (b)(1)(viii) and (b)(2)(v) of Rule 18a-6, as adopted. The adopted rule text modifies the proposed rule text in the following non-substantive ways. The Commission proposed to amend paragraph (b)(8) of Rule 17a-4 to add a reference to proposed Form SBS in the introductory text after references to certain parts of the FOCUS Report. It is no longer necessary to include this cross-reference, because as discussed below, the Commission is revising Part II and adopting Part IIC of the FOCUS Report instead of adopting Form SBS. However, non-substantive changes in connection with those revisions are being made to improve the clarity of paragraph (b)(8); namely, references to the parts of Form X-17A-5 now read “Part II or Part IIA of Form X-17A-5 (§ 249.617 of this chapter)” to improve readability, and the word “audited” is being removed from the phrase “annual audited financial statements” for consistency with Rules 17a-5 and 18a-7. Paragraph (b)(1)(viii) of Rule 18a-6, as adopted, reflects the following technical changes from paragraph (b)(1)(viii) of Rule 18a-6, as proposed to be adopted: (1) Paragraph (b)(1)(viii) references “Part II of Form X-17A-5 (§ 249.617 of this chapter)” instead of “Part II of Form X-17A-5 (§ 249.617 of this chapter), as applicable,” because there is no need to reference “as applicable” when only one part of Form X-17A-5 is being referenced; (2) paragraph (b)(1)(viii)(B) refers to “non-security-based swap customers” instead of “security-based swap customers” for consistency with paragraph (b)(8)(ii) of Rule 17a-4, as amended; (3) paragraph (b)(1)(viii)(H) no longer includes a comma after the word “cost” for consistency with paragraph (b)(8)(ix) of Rule 17a-4, as amended; and (4) paragraph (b)(1)(viii)(N) no longer includes a semicolon after the word “and” for consistency with paragraph (b)(8)(xvi), as amended.

Rule 15c3-4 Risk Management Records

OTC derivatives dealers and ANC broker-dealers are subject to risk management requirements.

166

In particular, Rule 15c3-4 requires these broker-dealers to establish, document, and maintain a system of internal risk management controls to assist in managing the risks associated with the firm's business activities, including market, credit, leverage, liquidity, legal, and operational risks. The rule also requires periodic reviews (which may be performed by internal audit staff) and annual reviews (which must be conducted by independent public accountants) of the firm's risk management systems. Paragraph (b)(10) of Rule 17a-4 requires broker-dealers subject to Rule 15c3-4 to preserve the records required to be made under the rule and the results of the periodic reviews required to be conducted under the rule.

166

See

17 CFR 240.15c3-4 (“Rule 15c3-4”).

The Commission proposed that nonbank SBSDs and MSBSPs be required to comply with Rule 15c3-4.

167

Broker-dealer SBSDs will be subject to paragraph (b)(10) of Rule 17a-4. The Commission proposed a parallel provision in Rule 18a-6 to require nonbank SBSDs and MSBSPs to preserve the same types of records relating to Rule 15c3-4.

168

The Commission did not propose that bank SBSDs and MSBSPs comply with Rule 15c3-4

169

and thus did not propose a

parallel record preservation requirement for these entities. The Commission received no comments on these proposals and has adopted the requirement that nonbank SBSDs and MSBSPs comply with Rule 15c3-4.

170

Consequently, the Commission is adopting the risk management records preservation requirements as proposed.

171

167

See Capital, Margin, and Segregation Proposing Release,

77 FR at 70250-51, 70256-57.

168

See Recordkeeping and Reporting Proposing Release,

79 FR at 25216.

169

See

Section 15F(d)(2)(A) of the Exchange Act (providing that the Commission may not prescribe

rules imposing prudential requirements on SBSDs and MSBSPs for which there is a prudential regulator).

170

See Capital, Margin, and Segregation Adopting Release,

84 FR at 43906-07.

171

See

paragraph (b)(1)(ix) of Rule 18a-6, as adopted.

Credit Risk Determinations

Paragraph (c)(4)(vi)(A) of § 240.15c3-1e (appendix E to Rule 15c3-1) requires an ANC broker-dealer to make and keep current a record of the basis of its internal credit assessments of counterparties for purposes of the credit risk charges it must take as part of its net capital computation. Paragraph (b)(12) of Rule 17a-4 requires an ANC broker-dealer to preserve these records. A broker-dealer SBSD approved to use models to compute net capital will be subject to the recordkeeping provision in paragraph (c)(4)(vi)(A) of appendix E to Rule 15c3-1 and the corresponding record preservation requirement in paragraph (b)(12) of Rule 17a-4. The proposed capital rule for SBSDs included a parallel provision requiring a stand-alone SBSD approved to use models to make and keep current the same type of record of the basis of its internal credit assessments of counterparties.

172

Therefore, the Commission proposed a parallel corresponding record preservation requirement in Rule 18a-6 for such a stand-alone SBSD.

173

The Commission received no comments on the proposal and adopted the requirement in the capital rule for stand-alone SBSDs to make and keep current these records.

174

Consequently, the Commission is adopting the credit risk determination preservation record requirement as proposed.

175

172

See Capital, Margin, and Segregation Proposing Release,

77 FR at 70340.

173

See Recordkeeping and Reporting Proposing Release,

79 FR at 25216-17.

174

See Capital, Margin, and Segregation Adopting Release,

84 FR at 44060; paragraph (e)(2)(iii)(F)(

) of Rule 18a-1.

175

See

paragraph (b)(1)(x) of Rule 18a-6, as adopted.

Regulation SBSR

As discussed above, the Commission has adopted Regulation SBSR, which assigns the duty to report a security-based swap transaction to a registered SDR.

176

The Commission proposed to amend paragraph (b)(14) of Rule 17a-4 to require that broker-dealers, including broker-dealer SBSDs and MSBSPs, preserve the information they are required to submit to a registered SDR under Regulation SBSR.

177

In addition, the Commission proposed to include parallel preservation requirements in Rule 18a-6 for stand-alone and bank SBSDs. The Commission received no comments on the proposed Regulation SBSR record preservation requirements and is adopting them as proposed.

178

176

See Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information,

80 FR 14567;

Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information,

81 FR 53546.

177

See Recordkeeping and Reporting Proposing Release,

79 FR at 25217.

178

See

paragraph (b)(14) of Rule 17a-4, as amended; paragraphs (b)(1)(xi) and (b)(2)(vi) of Rule 18a-6, as adopted.

Records Relating to Business Conduct Standards

As discussed above, the Commission has adopted Rules 15Fh-1 through 15Fh-6 and Rule 15Fk-1. These rules require, among other things, that SBSDs and MSBSPs make certain disclosures, provide certain notices, and make other records. The Commission proposed to amend paragraph (b) of Rule 17a-4 to add a requirement that broker-dealer SBSDs and MSBSPs preserve copies of documents, communications, and notices related to the business conduct and chief compliance officer requirements in Rules 15Fh-1 through 15Fh-6 and Rule 15Fk-1.

179

In addition, the Commission proposed to adopt parallel record preservation requirements in Rule 18a-6 for stand-alone and bank SBSDs and MSBSPs. The Commission received no comments on the proposed business conduct record preservation requirements and is adopting them as proposed.

180

179

See Recordkeeping and Reporting Proposing Release,

79 FR at 25217.

180

See

paragraph (b)(15) of Rule 17a-4, as amended; paragraphs (b)(1)(xii) and (b)(2)(vii) of Rule 18a-6, as adopted.

Section 15F(h)(4)(C) of the Exchange Act imposes duties on SBSDs that act as advisors to special entities. Paragraph (a) of Rule 15Fh-2 defines what it means to

act as an advisor to a special entity.

If an SBSD is acting in this capacity, Section 15F(h)(4)(C) and paragraph (b) of Rule 15Fh-4 require the SBSD to make reasonable efforts to obtain such information as it considers necessary to make a reasonable determination that a security-based swap or trading strategy involving a security-based swap is in the best interests of the special entity. Section 15F(h)(5)(A) and paragraph (a) of Rule 15Fh-5 require an SBSD or MSBSP that is acting as a counterparty to a special entity to have a reasonable basis to believe that the special entity has a “qualified independent representative,” as that term is defined in the rule. The Commission proposed to amend paragraph (b) of Rule 17a-4 to add a requirement that broker-dealer SBSDs and MSBSPs preserve records relating to the determinations made pursuant to Section 15F(h)(4)(C) and Section 15F(h)(5)(A) of the Exchange Act.

181

In addition, the Commission proposed parallel record preservation requirements in Rule 18a-6 for stand-alone and bank SBSDs. The Commission received no comments on the proposed special entity advisor record preservation requirements and is adopting them as proposed.

182

181

See Recordkeeping and Reporting Proposing Release,

79 FR at 25218. As noted above in section II.A.2.a. of this release, on October 31, 2018, the Commission issued a statement, which set forth the Commission's position that, for a period of five years from the Registration Compliance Date for SBSDs and MSBSPs (as defined in

Registration Process for Security-Based Swap Dealers and Major Security-Based Swap Participants,

See Statement on Business Conduct Standards,

83 FR at 55486. To the extent SBSDs and MSBSPs rely on the statement, the Commission encourages them to maintain records of the written representations described in the statement until such time as the statement is no longer in force.

182

See

paragraph (b)(16) of Rule 17a-4, as amended; paragraphs (b)(1)(xiii) and (b)(2)(viii) of Rule 18a-6, as adopted.

Corporate Documents

Paragraph (d) of Rule 17a-4 requires broker-dealers to preserve during the life of the enterprise corporate documents such as articles of incorporation, minute books, and stock certificate books. It also requires broker-dealers to preserve during the life of the enterprise registration and licensing information such as all Forms BD, Forms BDW, and licenses or other documentation showing registration with a securities regulatory authority. The Commission proposed to amend paragraph (d) of Rule 17a-4 to add references to proposed Form SBSE-BD and proposed Form SBSE-W.

183

These were the registration and withdrawal of registration forms, respectively, the Commission proposed for broker-dealer SBSDs and MSBSPs.

184

The

Commission proposed a parallel requirement in Rule 18a-6 for stand-alone and bank SBSDs and MSBSPs, except that rule text referred to the registration forms these entities would use (

i.e.,

Forms SBSE and SBSE-A, respectively) rather than Form SBSE-BD.

185

183

See Recordkeeping and Reporting Proposing Release,

79 FR at 25218.

184

See Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants,

Exchange Act Release No. 65543 (Oct. 12, 2011), 76 FR 65784 (Oct. 24, 2011);

see also Cross-Border Proposing Release,

78 FR 30968.

185

Paragraph (m)(3) of Rule 17a-4, as amended, defines the term “securities regulatory authority” to have the meaning set forth in paragraph (f)(3) of Rule 17a-3, as amended. Paragraph (h)(1) of Rule 18a-6, as adopted, defines the term “securities regulatory authority” in the same way as that term is defined in paragraph (f)(3) of Rule 17a-3, as amended. The Commission proposed to amend the definition of “securities regulatory authority” to include the CFTC and a prudential regulator to the extent the prudential regulator oversees entity's security-based swap activities. The Commission believes the better approach is to specifically reference the CFTC and the prudential regulator in a given recordkeeping provision where the inclusion of a reference to the CFTC or prudential regulator is appropriate given the type of registrant and the nature of the records. As a result, the Commission is adding references to the CFTC to paragraph (d) of Rule 17a-4, as amended, and a reference to the CFTC to paragraph (c) of Rule 18a-6, as adopted.

The Commission received no comments on these proposals and has adopted the forms.

186

However, to correct an inadvertent omission, they now also require preservation of Form SBSE-C (17 CFR 249.1600c).

187

The registration rule for SBSDs and MSBSPs requires firms applying to register as an SBSD or MSBSP to file Form SBSE-C (which contains two separate certifications) in addition to Forms SBSE, SBSE-A, and/or SBSE-BD.

188

For these reasons, the Commission is adopting the corporate document preservation requirements with the modifications discussed above.

189

186

See Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants,

Exchange Act Release No. 75611 (Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015).

187

The paragraphs as adopted contain updated cross-references to the CFR citations for Form SBSE, Form SBSE-A, Form SBSE-BD, and Form SBE-W (

i.e.,

17 CFR 249.1600, 17 CFR 249.1600a, 17 CFR 249.1600b, and 17 CFR 249.1601, respectively).

188

See

17 CFR 240.15Fb2-1(a).

189

See

paragraph (d) of Rule 17a-4, as amended; paragraph (c) of Rule 18a-6, as adopted.

Associated Persons

As discussed above, paragraph (a)(12) of Rule 17a-3 requires a broker-dealer, including a broker-dealer SBSD or MSBSP, to make and keep current records of information about associated persons, and the Commission is adopting parallel requirements in Rule 18a-5 to require a stand-alone or bank SBSD or MSBSP to make and keep current the same types of records.

190

Paragraph (e)(1) of Rule 17a-4 requires broker-dealers to maintain and preserve the associated person's records in an easily accessible place until at least three years after the associated person's employment and any other connection with the broker-dealer has terminated. The Commission proposed to include a parallel requirement in Rule 18a-6 for stand-alone and bank SBSDs and MSBSPs to maintain and preserve their records about associated persons.

191

The Commission received no comments on these proposed associated persons record preservation requirements and is adopting them as proposed.

192

190

See

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

191

See Recordkeeping and Reporting Proposing Release,

79 FR at 25218.

192

See

paragraph (d)(1) of Rule 18a-6, as adopted. Paragraph (h)(2) of Rule 18a-6, as adopted, defines the term “associated person” to have the same meaning as that term is defined in paragraph (c) of Rule 18a-5, as adopted.

Regulatory Authority Reports

Paragraph (e)(6) of Rule 17a-4 requires a broker-dealer, including a broker-dealer SBSD or MSBSP, to maintain and preserve in an easily accessible place each report that a securities regulatory authority has requested or required the firm to make and furnish to it pursuant to an order of settlement, and each regulatory exam report until three years after the date of the report.

193

The Commission proposed parallel record preservation requirements in Rule 18a-6 for stand-alone SBSDs and MSBSPs to maintain and preserve the same types of reports until three years after the date of the report.

194

The Commission proposed a parallel requirement in Rule 18a-6 for bank SBSDs and MSBSPs but only if the reports relate to security-based swap activities. The Commission received no comments on these proposed regulatory authority reports preservation requirements and is adopting them as proposed.

195

193

As discussed earlier, paragraph (m)(3) of Rule 17a-4 defines the term “securities regulatory authority” to have the meaning set forth in paragraph (f)(3) of Rule 17a-3, as amended. The Commission proposed to amend the definition of “securities regulatory authority” to include the CFTC and a prudential regulator to the extent the prudential regulator oversees security-based swap activities. The Commission believes the better approach is to specifically identify the CFTC and prudential regulator in a given recordkeeping provision where the inclusion of a reference to the CFTC or prudential regulator is appropriate given the type of registrant and the nature of the records.

See

paragraph (f)(3) of Rule 17a-3, as amended. As a result, the Commission is amending paragraph (e)(6) of Rule 17a-4 by adding references to reports requested or required by the CFTC.

194

See Recordkeeping and Reporting Proposing Release,

79 FR at 25218-19.

195

See

paragraphs (d)(2)(i) and (ii) of Rule 18a-6, as adopted. The Commission is replacing the term “regulatory authority” with the term “securities regulatory authority” in paragraphs (d)(2)(i) and (ii) of Rule 18a-6, as adopted. Paragraph (h)(1) of Rule 18a-6, as adopted, defines the term securities regulatory authority in the same way as that term is defined in paragraph (f)(3) of Rule 17a-3, as amended. As noted above, the Commission proposed to amend the definition of the term “securities regulatory authority” cross-referenced in paragraph (f)(3) of Rule 17a-3 to include the CFTC and prudential regulators but is declining to do so. In lieu of amending the definition of the term “securities regulatory authority,” the Commission is adding references to reports requested or required by the CFTC to paragraph (d)(2)(i) of Rule 18a-6, as adopted, and to reports requested or required by the CFTC or the prudential regulators to paragraph (d)(2)(ii) of Rule 18a-6, as adopted. The Commission staff consulted with staff from the prudential regulators and the CFTC in drafting the final rules discussed in this release, including paragraph (d)(2)(ii) of Rule 18a-6 (applicable to bank SBSDs and MSBSPs). The Commission recognizes that a bank SBSD or MSBSP may need to notify its prudential regulator(s) before furnishing (pursuant to paragraph (g) of Rule 18a-6) certain records identified in paragraph (d)(2)(ii) of Rule 18a-6.

Compliance, Supervisory, and Procedures Manuals

Paragraph (e)(7) of Rule 17a-4 requires a broker-dealer, including a broker-dealer SBSD or MSBSP, to maintain and preserve in an easily accessible place each compliance, supervisory, and procedures manual, including any updates, modifications, and revisions, describing the policies and practices of the broker-dealer with respect to compliance with applicable laws and rules and supervision of the activities of each natural person associated with the broker-dealer until three years after the termination of the use of the manual. The Commission proposed a parallel requirement in Rule 18a-6 for stand-alone SBSDs and MSBSPs to maintain and preserve the same types of compliance, supervisory, and procedures manuals for the same period of time.

196

The Commission proposed a parallel requirement in Rule 18a-6 for bank SBSDs and MSBSPs but only if the manuals involve compliance with applicable laws and rules relating to security-based swap activities. The Commission received no comments on these proposed compliance, supervisory, and procedures manual preservation requirements and is adopting them as proposed.

197

196

See Recordkeeping and Reporting Proposing Release,

79 FR at 25219.

197

See

paragraphs (d)(3)(i) and (ii) of Rule 18a-6, as adopted.

Electronic Storage

Paragraph (f) of Rule 17a-4 provides that the records a broker-dealer, including a broker-dealer SBSD or MSBSP, is required to maintain and preserve under Rules 17a-3 and 17a-4 may be immediately produced or reproduced on micrographic media or by means of electronic storage media and be maintained and preserved for the required time in that form. The use of

electronic storage media is subject to certain conditions, including that the media must preserve the records exclusively in a manner that is non-rewriteable and non-erasable (also known as a write once, read many or “WORM”).

198

The Commission proposed including a parallel record maintenance and preservation requirement in Rule 18a-6, but only with respect to electronic storage media.

199

The Commission believes that SBSDs and MSBSPs that are not dually registered as broker-dealers would not use micrographic media to maintain and preserve records because electronic storage media is more technologically advanced and offers greater flexibility in managing records.

200

198

See

paragraph (f)(2)(ii)(A) of Rule 17a-4.

199

See Recordkeeping and Reporting Proposing Release,

79 FR at 25219.

200

The Commission believes that most broker-dealers use electronic storage media rather than micrographic media for the same reasons.

The Commission received comments that its electronic storage requirements for SBSDs and MSBSPs, including for broker-dealers dually registered as SBSDs, should not mandate that the records be preserved exclusively in a WORM format.

201

One commenter further urged the Commission, in any event, “not to expand the WORM requirement to SBSDs at this time.”

202

The Commission also received comment requesting that it act on a rule petition filed by several organizations in November 2017 and harmonize its final rule with the CFTC's corresponding requirements, which were recently modified to eliminate a similar WORM requirement.

203

201

See, e.g.,

SIFMA 9/5/2014 Letter; Letter from Walt L. Lukken, President and Chief Executive Officer, Futures Industry Association (Nov. 29, 2018) (“FIA Letter”).

202

See, e.g.,

SIFMA 9/5/2014 Letter.

203

See

FIA Letter. The CFTC modified CEA Rule 1.31 to remove its WORM requirement in May 2017.

See Recordkeeping,

82 FR 24479 (May 30, 2017).

The Commission's electronic record storage requirements in Rule 17a-4 are based on the “importance for recordkeeping of ready access, reliability, and permanence of records.”

204

The Commission has described the recordkeeping requirements in Rules 17a-3 and 17a-4 as “integral to the Commission's investor protection function because the preserved records are the primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards.”

205

Any modification to the electronic storage requirements in Rule 17a-4 may raise issues that are distinct from those raised by stand-alone and bank SBSDs and MSBSPs. Accordingly, the Commission believes that any change to these requirements should be addressed in a separate regulatory initiative in which the Commission intends to consider electronic storage media issues.

204

See Reporting Requirements for Brokers or Dealers Under the Securities Exchange Act of 1934,

Exchange Act Release No. 38245 (Jan. 31, 1997), 62 FR 6469 (Feb. 12, 1997).

205

Electronic Storage of Broker-Dealer Records,

Exchange Act Release No. 47806 (May 7, 2003), 68 FR 25281 (May 12, 2003).

However, the Commission is clarifying that the WORM requirement does not mandate the use of a specific type of media. In particular, the Commission issued guidance in 2003 to clarify that the WORM requirement can be met using an “electronic storage system that prevents the overwriting, erasing or otherwise altering of a record during its required retention period through the use of integrated hardware and software control codes.”

206

This statement in the release—because it refers to “hardware” control codes—has raised questions as to whether an electronic storage system that relies exclusively on software coding to meet the WORM requirement is permitted under the rule. The Commission is clarifying that a software solution that prevents the overwriting, erasing, or otherwise altering of a record during its required retention period would meet the requirements of the rule. For example, the rule does not require the use of a specific medium such as optical disk, CD-ROM, or magnetic tape to meet the WORM requirement.

206

Electronic Storage of Broker-Dealer Records,

68 FR 25282.

The Commission recognizes that the entities that may register as stand-alone or bank SBSDs or MSBSPs may have existing electronic storage systems that do not meet the WORM requirement and therefore could incur substantial costs in building a recordkeeping system that meets this requirement. For these reasons, the Commission is modifying Rule 18a-6 to eliminate the requirement that the electronic storage system preserve the records exclusively in a non-rewriteable and non-erasable format (

i.e.,

a WORM format).

207

In connection with this modification, the Commission is eliminating the proposed requirement that the stand-alone or bank SBSD or MSBSP notify the Commission at least 90 days before using electronic storage media other than optical disk technology because this provision is no longer relevant given the absence of the WORM requirement in the rule as adopted.

208

The Commission also is modifying the proposed rule text by replacing the phrase “electronic storage media” throughout paragraph (e) of Rule 18a-6, as adopted, with the phrase “electronic storage system” to further clarify that the final rule does not require the use of a particular storage

media

such as optical disk or CD-ROM (as is the case with Rule 17a-4, as noted above).

209

207

This requirement was in paragraph (e)(2)(ii)(A) of Rule 18a-6, as proposed.

208

This requirement was in paragraph (e)(2)(i) of Rule 18a-6, as proposed.

209

See paragraph (e) of Rule 18a-6, as adopted. The Commission also is deleting the phrase “on any medium acceptable under § 240.18a-6” from paragraph (e)(3)(iii) of Rule 18a-6. In addition, the Commission is also replacing throughout paragraph (e) references to information placed “on” electric storage systems with references to information placed “in” such systems.

The Commission is modifying the provision of the rule that required the original and duplicate units of the storage media to be serialized and time-dated to clarify that this must be done

if applicable

(

i.e.,

if the firm uses a storage media such as optical disk or CD-ROM).

210

The Commission also is modifying the provision of the rule that required the firm to have available facilities for immediate, easily readable projection or productions of electronic storage media

images

and for producing easily readable

images;

the final rule instead provides that the facilities can be for the projection or production of images or

records

that are maintained on the electronic storage system.

211

This modification is designed to accommodate electronic storage systems that do not use optical disk or CD-ROM media. Further, the Commission is modifying the provision of the rule that required the firm to be ready at all times to immediately provide an

facsimile enlargement

which the staff of the Commission may request; the final rule requires instead that the firm must be ready at all times to immediately provide

in a readable format any record or index stored on the electronic storage system

which the staff of the Commission may request.

212

210

See

paragraph (e)(2)(ii) of Rule 18a-6, as adopted.

211

See

paragraph (e)(3)(i) of Rule 18a-6, as adopted.

212

See

paragraph (e)(3)(ii) of Rule 18a-6, as adopted.

The elimination of the WORM requirement as the exclusive means of storing records electronically will provide flexibility to stand-alone and bank SBSDs and MSBSPs in terms of establishing and maintaining electronic storage systems and will eliminate a potential conflict with the requirements of

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