On January 12, 2017, the Commodity Futures Trading Commission (CFTC) unanimously approved proposed amendments (Proposal) to the recordkeeping obligations set forth in CFTC Regulation 1.31 (Recordkeeping Rule).1 The Proposal is a long-awaited response to multiple industry groups’ petitions for rulemaking urging the CFTC to modernize the outdated Recordkeeping Rule.2
The Proposal seeks to ensure the Recordkeeping Rule is up-to-date in light of technology changes and recognizes significant advances in the use and knowledge of information technology among market participants since the rule was last amended. Market participants will generally welcome the Proposal, which includes long-sought changes, such as making the form and manner in which regulatory records must be kept technology neutral and removing the requirement for certain recordkeepers to hire third-party technical consultants. Importantly, the Proposal is intended to be technology neutral, so, as technology develops, the Recordkeeping Rule should not become stale. The Proposal has also reorganized the Recordkeeping Rule for ease of understanding, including by adopting new definitions.
Other than amendments to incorporate swaps into the Recordkeeping Rule, the rule was last substantively amended in 1999. Unsurprisingly, the rule contains specific requirements both industry groups and the CFTC find outdated and irrelevant, given the pace of technological innovation and industry best practices. Specifically, the Recordkeeping Rule currently requires paper records to be kept in their original form and electronic records to be kept in the format in which they were first created or “native file format.” Electronic records must be stored exclusively in “write once, read-many” or “WORM” format — technology that was cutting edge in 1999, but has since become obsolete — and recordkeepers who use only electronic media to store records must hire third-party technical consultants that are capable of furnishing the CFTC with electronic records upon request. The Petition pointed out that these outdated requirements often force recordkeepers to choose between compliance with the letter of the law and the use of new technology and current best practices, and that, given the growth of in-house information technology departments, the requirement to hire a technology consultant is simply an unnecessary burden and expense.
Form and Manner of Record Retention
The Proposal principally seeks to address perceived outdated and irrelevant obligations imposed by the current Recordkeeping Rule by eliminating technology-specific requirements and, instead, focusing on the integrity and availability of regulatory records generally. The Proposal also seeks to “future proof” the Recordkeeping Rule by intentionally making the form and manner in which regulatory records must be retained technology neutral. Specific proposals include eliminating references to specific media formats and eliminating the requirements to: retain records in their “native file format”; store electronic records in WORM format; and hire the required third-party technical consultants.
The Proposal replaces technology-specific requirements with a focus on the scope of regulatory records that must be kept and the integrity and availability of such records. Accordingly, the proposal creates a new definition of “regulatory records”3 that clearly states that all prior versions of any regulatory record must be retained, no matter how modified, rather than specifying any specific storage format. To ensure the integrity of such records, the definition includes the “metadata” that identifies the manner in which a record has been altered. All regulatory records are to be subject to the same general standard that records be retained in a form and manner necessary to ensure their authenticity and reliability. For electronic regulatory records,4 the deletion of form-specific media requirements is proposed to be replaced by a requirement that such records be stored in systems that “maintain security, signature, chains of custody elements, and data as necessary to ensure the authenticity of the information contained in regulatory records.” To ensure the availability of records, the Proposal requires that such systems ensure that records be available in the event of an emergency or other disruption and that the relevant system be capable of creating up-to-date inventories of regulatory records.
These proposals are intended to serve the same policy function as the native file format and WORM requirements by ensuring that information is preserved as it was first recorded and is not susceptible to being altered, without making the Recordkeeping Rule itself susceptible to becoming outdated due to technological changes. For example, the Proposal potentially permits market participants to utilize new technology, potentially even including distributed ledger technologies, for recordkeeping. Recordkeepers should note that that operators of whatever recordkeeping systems are developed will need to verify that their systems adequately maintain the “security, signature, chain of custody elements, and data necessary to ensure the authenticity” of the information contained therein and that they will be able to satisfy the record production requirements discussed below.
Policies and Procedures
The Proposal requires all “records entities”5 to establish, maintain, and implement written policies and procedures reasonably designed to ensure compliance with the Recordkeeping Rule. While this obligation is consistent with the current policies and procedures requirement in the Recordkeeping Rule, the new definition of “records entity” expands the applicability of this obligation. Currently, the CFTC regulations distinguish between different classes of persons required to keep books and records. CFTC registrants, such as commodity pool operators and commodity trading advisors, and “registered entities,” such as futures exchanges and clearing organizations, must fully comply with the current Recordkeeping Rule, while persons required to retain records by other provisions of the CFTC’s regulations, such as large trader records under CFTC Part 20, are not subject to compliance with the Recordkeeping Rule.6 The new definition of “records entity” would require compliance with the Recordkeeping Rule by all persons required to keep any books and records under CFTC regulations, even if such persons are not CFTC registrants or registered entities. The expanded scope of persons required to comply with the Recordkeeping Rule could be controversial, as the Recordkeeping Rule does require additional costs to put in place the necessary procedures and it is not clear that all persons subject to the Recordkeeping Rule, as proposed, would have appropriate notice that they will need put in place such procedures. For example, a trader may have little reason to know the requirements of the Recordkeeping Rules until such person enters into a trade that triggers recordkeeping obligations under the CFTC’s Part 20 large commodity swap trader rules, but that person may need to have the necessary procedures in place prior to entering into the triggering trade.
Other Aspects of the Proposal
Inspection and Production of Records. The Proposal makes no change in the requirement for a records entity to produce records to the Department of Justice. However, the Proposal differentiates between the production of paper and electronic regulatory records. Both types of records are proposed to be produced “promptly” upon request, a relaxation of the current requirement to produce records stored on micrographic or electronic media immediately upon request. However, for non-paper records, the Proposal requires the CFTC to specify the form and medium in which the production must be made. If a records entity cannot promptly produce the record in the requested form and medium, the records entity may produce the record in an alternative manner sufficient for the CFTC to inspect the record. The Proposal stresses that it is not sufficient to reduce electronic records to paper or portable document format (PDF) format because the CFTC must be able to evaluate the integrity of the electronic records via the associated metadata. The ability of a records entity to produce the original record in lieu of a copy is preserved.
Duration of Retention of Records. The Proposal makes no substantive changes in the retention periods for the various categories of records (i.e., records of swap or related cash or forward transactions, records of oral communications of such transactions, paper records regardless of category and all other regulatory records).7
Written Representation. The Proposal eliminates as outdated the current requirement to provide a written representation to the CFTC prior to using electronic storage media other than optical disks/CD-ROMs that affirms that the media satisfies the requirements of the Recordkeeping Rule.
Hard Copy Paper Records. The Proposal eliminates as outdated the current requirement to keep certain paper records such as time cards and electronically filed certified forms in hard copy. This is consistent with the Proposal’s general elimination of any required form and manner of retaining regulatory records.
Comments on the Proposal are due no later than March 20, 2017. The future of the proposal is uncertain given the possibility for broader changes in U.S. regulatory policy due to the recent presidential transition.
1 Recordkeeping, 82 Fed. Reg. 6356 (Jan. 19, 2017); available at http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2017-01148a.pdf.
2 See, e.g., Petition for Rulemaking to Amend CFTC Regulations 1.31, 4.7(b) and (c), 4.23 and 4.33, Managed Funds Association, Investment Adviser Association and Alternative Investment management Association; available at https://www.managedfunds.org/wp-content/uploads/2014/07/Final-Petition.pdf (the Petition).
3 “Regulatory records” is defined in the Proposal to mean “all books and records required to be kept by the Act or Commission Regulations, in this chapter, including any record of any correction or other amendment to such books and records, provided that, with respect to such books and records stored electronically, regulatory records shall also include: (i) All data produced and stored electronically that describes, directly or indirectly, the characteristics of such books and records, including, without limitation, data that describes how, when, and, if relevant, by whom such electronically stored information was collected, created, accessed, modified, or formatted; and (ii) Any data necessary to access, search, or display any such books and records.”
4 “Electronic regulatory records” is defined in the Proposal to mean “all regulatory records other than regulatory records exclusively created and maintained by a records entity on paper.”
5 “Records entity” is defined in the Proposal to mean “any person required by the Act or Commission Regulations to keep regulatory records.”
6 See CFTC Regulation 20.6.
7 The Proposal would eliminate references to “oral communications” in CFTC regulations 1.35 and 23.202 in order to future-proof those regulations as well, the intent being that CFTC Regulation 1.31 sufficiently covers the recordkeeping obligations with respect to oral records.
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