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Broker-dealers can stop burning records to CD, but they don’t have to, says SEC

New-fangled cloud storage now an option. What's that internet app the kids are all using again? Whatsupp?

The world's financial regulators seem to have only become aware of the possibilities of OTT apps like WhatsApp and Signal over the past year or so, and now they have learned about cloud storage too.

While jotting down the final rule amendments to its Electronic Recordkeeping Requirements note this week, America's Securities and Exchange Commission (SEC) said the brokerages it regulates will soon be able to move their records off compact discs and onto the cloud.

Wednesday's update [PDF] was the first tweak to recordkeeping requirements by the Federal agency in 25 years.

SEC chair Gary Gensler remarked: "Since the 1930s, recordkeeping obligations have been vital to maintain market integrity and the SEC's work as the cop on the beat. Today's rule amendments will facilitate the SEC's ability to examine and inspect records consistent with modern technology."

Fondly remembering a CD mixtape, he added that "some of the public may have experience with such recordkeeping if, for instance, they ever burned a CD. You had to get the playlist just right, as the data later could not be modified, overwritten, or erased. In the case of electronic recordkeeping, this helped to ensure the reliability and preservation of original records."

"In the 25 years since we last updated these rules, technology has transformed, and not only in the sense that iTunes has shut down."

From the mid-2010s, PC makers began to stop including built-in optical disc drives. The last Thinkpad to include one, for example (the 2.13kg T440p), rolled off the assembly lines in 2013, ran Windows 10, and had DVD/CD combo drive with burner. Plenty of people still use external drives – in Germany, for example, where CDs are still very popular – external drives fly off the shelves.

Quipping about the CD-ROM's write-once/read-many (WORM) format, Gensler added: "You might say, as Shakespeare once did, that even a worm will turn."

Let's pause while you recover from laughing at that.

The WORM reference is because the current recordkeeping rule – conceived of in 1997 – requires firms to preserve electronic records exclusively in the non-rewriteable, non-erasable format.

At least one of the reasons for the move to the cloud – or as the doc puts it, the addition of "an audit-trail alternative" – appears to be cost, with one commenter saying that for "many broker-dealers, adoption of the proposal will result in significant cost savings and efficiencies."

With the updates, broker-dealers can now save their records to the cloud along with an audit trail that records any changes in the documents – or contract that work out to a third party.

This means they will soon be able to store information on their own servers or those of a third party, as long as they have a way for the SEC to access the data. This could mean having someone at the CSP to allow access, or appointing their own executive officer to ensure the SEC can get in and have a look around if it needs to.

The amendments appear to be an alternative rule, though, meaning brokerages can just stick to burning data onto CD-ROM, should they wish.

The federal agency last year launched sweeping investigations into multiple companies during a period between January 2018 through September 2021 and ultimately found 15 broker-dealers and one affiliated investment adviser had made "widespread and longstanding failures ... to maintain and preserve electronic communications," preferring to discuss work matters over off-channel media including WhatsApp and other OTT apps.

Ultimately, the financial firms had to collectively pay nearly $2 billion in settlements to the SEC and the Commodity Futures Trading Commission – and the UK's Financial Conduct Authority has launched its own probe into their dealings, too. Maybe they just couldn't find their CDs. ®

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