The Commodity Futures Trading Commission amended its recordkeeping requirements to eliminate many existing antiquated requirements and to be “technology neutral” in order to accommodate future advances in recordkeeping technology.
Among other things, the amended rule eliminates the existing requirement that,
- electronic records be maintained in their native file format and preserved exclusively in a non-rewritable, non-erasable format (commonly referred to as write once, read many or “WORM”) and
- records holders use a third-party technical consultant to provide certain representations to the Commission regarding access to a record holder’s required electronic records.
Instead, the amended rule solely requires that all “regulatory records” be maintained in a way that “ensures the authenticity and reliability of such regulatory record” in accordance with applicable law and CFTC regulations.
The CFTC’s amended rule apples to all records that applicable law or CFTC regulations generally requires any person (including a legal entity, such as a corporation) to keep – whether a CFTC registrant or not (such records are termed "regulatory records" while such a person is referenced as a "records entity"). A regulatory record includes all books and records required to be kept, as well as any correction or amendment, and for electronic records,
(i) any data necessary to access, search or display any such books and records; and
(ii) all data produced and stored electronically describing how and when such books and records were created, formatted and modified.
However, to the extent other existing rules today relax certain recordkeeping obligations for certain persons, those rules will continue to trump the new amended recordkeeping rule. (e.g., recordkeeping obligations for trade option counterparties who are not swap dealers or major swap participants, or of unregistered members of exchanges regarding text messages and maintaining required records in a particular way; click here to access CFTC Rule 1.35(a)).
All records entities maintaining required books and records electronically must “establish appropriate systems and controls that ensure the authenticity and reliability of electronic regulatory records” However, the Commission determined not to require records entities to adopt specific policies and procedures reasonably designed to ensure the person’s compliance with the new recordkeeping requirements, as originally proposed. The Commission determined that, given the specificity of record keepers obligations under the amended rule, the proposed requirement for written policies and procedures was unnecessary. (Click here for background on the CFTC’s entire initial proposal in the article, “New Records Retention Regime for 21st Century Proposed by CFTC” in the January 16, 2017 edition of Bridging the Week.)
The CFTC determined not to change the duration of recordkeeping requirements in its amended rule with one exception. The CFTC agreed with two commentators’ request that the retention duration for electronic pre-execution communications that are required to be kept by swap dealers and major swap participants should be reduced to five years from the date of creation of the required record, not for five years from after the termination of the swap as currently is the obligation. (Click here for background regarding this requirement in CFTC Rule 23.202(a)(1).)
Because the amended rule was not intended to change what constitutes required records, the CFTC said that it would not provide guidance regarding requests for algorithmic trading systems’ source code, in response to a request from one commentator. The CFTC’s proposed amended rule does not impact record-keeping requirements of the Securities and Exchange Commission.
The CFTC’s amended recordkeeping rule will go into effect 90 days after it is published in the Federal Register.
Compliance Weeds: Although the new amended CFTC recordkeeping rules eliminates the anachronistic formal requirements that electronic books and records be maintained in WORM format and the need for an electronic records keeper to engage a third-party technical consultant, the new requirements are still very strict, albeit principles-based, with an eye towards accommodating evolving technologies.
As the Commission noted in issuing its amended rule,
[T]he obligation to satisfy the [new amended requirements] is one that a records entity ignores at its peril. It is ultimately the duty and responsibility of records entities to ensure accurate and reliable records.
Moreover, the new amended rule, does not require record entities to draft new policies and procedures.
That being said, persons impacted by the new amended rule, particularly non-registrants who may be required to maintain required records, should carefully review the new requirements to ensure their retention system comports with the Commission’s new expectations. For most firms, the amended rule will prove beneficial as it provides flexibility. But for others that may have overlooked compliance previously, now’s the time to get it right!
My View: Kudos to the Commission and staff for processing this helpful amended rule in only 64 days, from the close of the time period for public comments on March 20 to May 23.