On September 19, 2019, the Securities and Exchange Commission (SEC or Commission) adopted new rules and amendments establishing recordkeeping and reporting requirements for security-based swap dealers (SBSDs), major security-based swap participants (MSBSPs) and broker-dealers.¹ Although the rules become effective on February 14, 2020, the “compliance date” is tied to the date when SBSDs and MSBSPs must register with the SEC (i.e., October 6, 2021).²

Market participants should review the new rule requirements to assess whether improvements in technology are required to meet minimum standards for recordkeeping and reporting. SBSDs and MSBSPs that do not have the technology to store and maintain the information required by the new rules and rule amendments may need to invest in new systems and technology. 

I. Entities Subject to the Rules

The Title VII recordkeeping and reporting requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) applicable to a particular SBSD, MSBSP or broker-dealer will depend on the organization and registration status of the registrant. The key registration categories for purpose of this rulemaking include:  

• registered with the SEC only as an SBSD (a stand-alone SBSD); 
• registered with the SEC as a broker-dealer,³ including an entity registered with the SEC as both a broker-dealer and an SBSD (a broker-dealer SBSD);
• an SBSD or an MSBSP that is dually registered with the Commodity Futures Trading Commission’s (CFTC) as a swap dealer or major swap participant; and
• an SBSD or swap dealer that is regulated by a US prudential regulator (a bank SBSD or bank SD).

As discussed in more detail below, certain recordkeeping requirements will also vary based on additional factors, such as whether an SBSD can compute its capital using models that have been approved by the SEC or is a non-US person.  

II. Recordkeeping

The SEC’s new rules establish the requirements for broker-dealer SBSD, stand-alone SBSD and bank SBSD recordkeeping programs. These rules are largely modeled on the recordkeeping requirements for broker-dealers set forth in Rules 17a-3 and 17a-4. Broker-dealer SBSDs and MSBSPs will be subject to Rules 17a-3 and 17a-4, while stand-alone SBSDs, bank SBSDs and MSBSPs will be subject to Rules 18a-5 and 18a-6.

Rules 18a-5 and 18a-6 do not include a parallel requirement for every requirement in Rules 17a-3 and 17a-4. Further, the recordkeeping requirements applicable to bank SBSDs and MSBSPs are more limited in scope due to limitations in the SEC’s statutory authority under Section 15F(f)(1)(B)(i) of the Exchange Act to regulate activities related to the conduct of the firm’s business as an SBSD or MSBSP. Additionally, bank SBSDs and MSBSPs are subject to recordkeeping requirements applicable to banks with respect to their banking activities, and the prudential regulators, not the SEC, are responsible for capital, margin and other prudential requirements applicable to bank SBSDs. 

A. Current Records

The SEC adopted amendments to Rule 17a-3 to account for the security-based swap and swap activities of broker-dealers, including broker-dealers (and OTC derivatives dealers) registered as SBSDs and MSBSPs. The SEC adopted new Rule 18a-5 requiring stand-alone SBSDs, bank SBSDs and MSBSPs to make and keep current certain records. An SBSD or MSBSP that is also registered with the CFTC as a swap dealer or major swap participant may comply with the recordkeeping requirements of the Commodity Exchange Act and the rules thereunder in lieu of complying with certain requirements of Rule 18a-5. At a high level, the new rules impose the following recordkeeping requirements:

• The Amendments to Rule 17a-3 require four additional types of records to be made and kept current by broker-dealer SBSDs.⁴ 
• New Rule 18a-5 requires 16 types of records to be made and kept current by stand-alone SBSDs.⁵ 
• New Rule 18a-5 requires thirteen types of records to be made and kept current by bank SBSDs, all of which are limited to the firm’s business as an SBSD.⁶  

B. Record Maintenance and Preservation Requirements

The SEC rules will require broker-dealer SBSDs, stand-alone SBSDs and bank SBSDs to maintain and preserve certain records. The SEC amended Rule 17a-4 to account for the security-based swap activities of broker-dealers, including broker-dealer (and OTC derivatives dealers) SBSDs and MSBSPs and adopted new Rule 18a-6 to establish record maintenance and preservation requirements for stand-alone SBSDs, bank SBSDs and MSBSPs. The new record Rule 18a-6 is largely modeled after Rule 17a-4. Similar to current recordkeeping requirements discussed above, Rule 18a-6 does not include a parallel requirement for every requirement in Rule 17a-4. 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.

• The Amendments to Rule 17a-4 add five types of records to be preserved by broker-dealers and six records to be preserved by broker-dealer SBSDs.
• New Rule 18a-6 requires 30 types of records to be preserved by stand-alone SBSDs and one additional type of record by stand-alone SBSDs authorized to use models to compute capital.  
• New Rule 18a-6 requires 22 types of records to be preserved by bank SBSDs, all of which are limited to the firm’s business as an SBSD.

The new rules require broker-dealer SBSDs, stand-alone SBSDs and bank SBSDs to maintain and preserve originals of all communications received and copies of all communications sent (and any approvals thereof) by the registrant relating to its security-based swaps activities. The term “communications” includes voluntarily recorded telephone calls. Note that maintenance of recorded calls for a three-year period is a new requirement derived from the statutory text of Section 15F(g)(1) of the Exchange Act.

The SEC is not requiring stand-alone SBSDs, bank SBSDs, CFTC-registered swap dealers and MSBSPs to preserve records in a non-rewritable and non-erasable (WORM) format, which may have resulted in substantial implementation costs. Broker-dealers (including OTC derivatives dealers) that are dually registered as SBSDs will be required to preserve records in a WORM format.  

III. Reporting

The Commission has established a reporting program for SBSDs and MSBSPs under Sections 15F and 17(a) of the Exchange Act, modeled on the reporting program for broker-dealers under Rule 17a-5. The Commission has adopted amendments to Rule 17a-5 and has adopted new Rule 18a-7. A stand-alone broker-dealer, including a stand-alone OTC derivatives dealer, will continue to be subject to Rule 17a-5. However, a broker-dealer, other than an OTC derivatives dealer, that is also an SBSD will be subject to Rule 17a-5. A stand-alone SBSD will be subject to Rule 18a-7. An SBSD that is also an OTC derivatives dealer (OTCDD/SBSD) will be subject to Rule 18a-7. Finally, a bank SBSD or an MSBSP will be subject to Rule 18a-7. 

The Commission also has adopted amendments to the FOCUS Report applicable to SBSDs. For example, bank SBSDs will be required to file new FOCUS Report Part IIC on a quarterly basis. Three of the five sections required by FOCUS Report Part IIC mirror or are scaled-down versions of schedules to FFIEC Form 031, which banks are already required to file with their prudential regulator. Bank SBSDs dually registered as futures commission merchant (FCMs) will be required to complete five additional sections; however, these five sections mirror information already required by the CFTC on Form 1-FR-FCM.  

New Rule 18a-7, which is modeled on Rule 17a-5, will require stand-alone SBSDs, bank SBSDs, MSBSPs and OTCDD/SBSDs to satisfy certain regular reporting requirements.  

IV. Notification

The SEC adopted a notification program for SBSDs and MSBSPs under Sections 15F and 17(a) of the Exchange Act. Rule 17a-11 specifies the circumstances under which a broker-dealer must notify the SEC and other regulators about its financial or operational condition. New Rule 18a-8 is modeled on Rule 17a-11 and establishes reporting requirements for SBSDs and MSBSPs that will not be subject to Rule 17a-11 (i.e., stand-alone SBSDs and bank SBSDs). Rule 18a-8 does not include a parallel requirement for every requirement in Rule 17a-11. 

Notice will be required for failures to meet minimum capital requirements, to provide early warning of potential capital or model problems, to report an adjustment of reported capital category, to report a failure to keep books and records, to report a material weakness, and to report a failure to make a required reserve deposit. The rule also specifies the manner in which notice is to be provided. 

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

Broker-dealer SBSDs, including OTCDD/SBSDs, and broker-dealer MSBSPs will be subject to the securities count program codified under Rule 17a-13. The rule will require these entities to examine and count the securities they physically hold, account for the securities that are subject to their control or direction but are not in their physical possession, verify the locations of securities under certain circumstances, and compare the results of the count and verification with their records. Rule 18a-9 will impose requirements similar to those of Rule 17a-13 to stand-alone SBSDs. Rule 18a-9, however, will not apply to stand-alone MSBSPs. Rules 18a-9 and 17a-13 require SBSDs to count, verify and reconcile securities in their possession or control. The rules specify the frequency of such securities counts and specify independence requirements for the persons who perform such counts.    

VI. Alternative Compliance Mechanisms

The SEC adopted two alternative compliance mechanisms that provide firms the ability to comply with the SEC’s rules through alternative means. First, the SEC adopted a limited alternative compliance mechanism available to certain registered SBSDs that are dually registered with the CFTC as swap dealers. Second, the SEC adopted a full alternative compliance mechanism available to certain SBSDs that are dually registered with the CFTC as swap dealers and are predominantly engaged in a swaps business. 

VII. Cross-Border Application and Availability of Substituted Compliance

“Substituted compliance” permits a foreign entity registered with the SEC to satisfy certain US legal requirements by complying with a rule or requirement of another jurisdiction. In May 2016, the SEC adopted Rule 3a71-6, which provides that substituted compliance is available with respect to the SEC’s business conduct requirements, and reserved the issue as to whether substituted compliance also would be available in connection with other requirements under the statute.⁷ Rule 3a71-6 was subsequently amended to make substituted compliance available with respect to the SEC’s trade acknowledgment and verification requirements and to make it available with respect to capital and margin requirements.⁸

The SEC views recordkeeping and reporting requirements as entity-level requirements applicable to all the security-based swap transactions of the registered entity regardless of the US person status of the entity or the US person status of the entity’s counterparty to any particular transactions. Thus, foreign SBSDs will need to comply with the recordkeeping and reporting requirements (or their foreign equivalent) for all such transactions, and not just transactions involving US persons. However, in this rulemaking, the SEC amended Rule 3a71-6 to provide foreign SBSDs with the potential to rely on substituted compliance with comparable foreign requirements to satisfy the recordkeeping and reporting requirements of Section 15F of the Exchange Act and Rules 18a-5, 18a-6, 18a-7, 18a-8, and 18a-9 thereunder.