2017-01-19 | 2017-01148Added · Updated
The Commodity Futures Trading Commission proposes to amend its recordkeeping regulations to allow recordkeepers to leverage modern information technology for retaining and producing records. The proposal eliminates outdated requirements for native file formats, WORM storage, and third-party technical consultants while maintaining safeguards for record integrity and accessibility. These changes aim to reduce compliance costs and cybersecurity risks for entities subject to the Commodity Exchange Act.
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COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1 and 23 RIN 3038–AE36 Recordkeeping AGENCY: Commodity Futures Trading Commission. ACTION: Proposed rule. SUMMARY: The Commodity Futures Trading Commission (the ‘‘Commission’’) is proposing to amend the recordkeeping obligations set forth in certain provisions of the Commission’s regulations. The proposed amendments would permit recordkeepers to leverage advances in information technology as a means to reduce costs associated with the retention and production of paper and electronic records and to decrease the risks of cybersecurity threats, while maintaining necessary safeguards to ensure the integrity, availability, and accessibility of records required to be kept pursuant to the Commodity Exchange Act (the ‘‘CEA’’) or Commission regulations. In addition to providing recordkeepers with greater flexibility regarding the retention and production of regulatory records, the proposed amendments would remove the requirements for electronic records to be kept in their native file format and for recordkeepers to enter into an arrangement with a third-party technical consultant with respect to electronically stored information. DATES: Comments must be received on or before March 20, 2017. ADDRESSES: You may submit comments, identified by RIN 3038–AE36, by any of the following methods:
1 17 CFR 145.9. Commission regulations referred to herein are found at 17 CFR chapter I. 2Proposed Rule Requiring that Records Subject to Inspection, and Copies Thereof, Be Provided to the Commission, 43 FR 50699 (Oct. 31, 1978). 3 General Regulations; Inspection of Books and Records, 46 FR 21–01 (Jan. 2, 1981). 4Adaptation of Regulations to Incorporate Swaps, 77 FR 66288 (Nov. 2, 2012) (the ‘‘2012 Amendment’’). 5Recordkeeping, 64 FR 28735 (May 27, 1999) (the ‘‘1999 Amendment’’). 6Petition for Rulemaking to Amend 1.31, 4.7(b) and (c), 4.23 and 4.33, Managed Funds Association, Investment Adviser Association, and Alternative Investment Management Association, dated July 21, 2014, and Petition for Rulemaking to Amend CFTC Regulations 4.12(c)(3), 4.23 and 4.33 Investment Company Institute, dated March 11, 2014 (collectively, the ‘‘Petitioners’’). Regulations 4.23 and 4.33 set forth the recordkeeping requirements for commodity pool operators (‘‘CPOs’’) and commodity trading advisors (‘‘CTAs’’), respectively. These regulations require CPOs and CTAs to keep certain books and records in accordance with § 1.31. Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
7See Electronic Recordkeeping by Investment Companies and Investment Advisers, 66 FR 29224 (May 30, 2001). Given that intermediaries may engage in both securities and derivatives transactions, operators of investment companies may be required to register with the Commission as CPOs, and investment advisers similarly may be required to register as CTAs. 8 64 FR at 28735. 9See Harmonization of Compliance Obligations for Registered Investment Companies Required to Register as Commodity Pool Operators, 78 FR 52308 at 52309 (Aug. 22, 2013). 10 64 FR at 28736. 11 Id.
3. Amend § 1.31(b) to eliminate the
requirement to enter into an agreement with a Technical Consultant. With respect to native file format, the Petitioners note that programs used to store records electronically routinely become outdated and obsolete, and/or are no longer supported by information technology manufacturers. As a result, as represented by the Petitioners, recordkeepers must bear the burden of retaining these electronic records while updating to other, advanced systems for newly created records. Accordingly, the Petitioners request that the Commission amend § 1.31 in a manner that does not specify the format of any particular electronic record, so long as there is demonstrable and auditable integrity and fidelity in the preservation of the underlying data and contents. With respect to the WORM requirement, the Petitioners assert that it is based on a concept that was state of the art nearly twenty years ago. Records are no longer stored electronically on optical disks or CD– ROMs. Currently, state of the art information technology relies on storage subject to restricted access and includes storage logs that reflect every single change to a file, in addition to archived copies. Absent any change, the Petitioners state that recordkeepers will be required to maintain dual systems that preserve the WORM requirement but also permit them to more properly secure and manage electronic records. Accordingly, the Petitioners request that the Commission amend § 1.31 to remove the WORM requirement. With respect to the Technical Consultant, the Petitioners state that the need to retain and train a third-party to serve as a surrogate for access and production to electronic records is no longer necessary given the in-house technical expertise regarding information technology throughout the industry. In addition to the increased costs associated with retaining a Technical Consultant, the Petitioners also note that providing additional third parties with access to sensitive, confidential, and proprietary information greatly increases the risk of cybersecurity intrusions. Accordingly, the Petitioners request that the Commission amend § 1.31 to remove the requirement to retain a Technical Consultant. In support of their request, Petitioners note that the Securities and Exchange Commission (‘‘SEC’’) adopted a recordkeeping rule for investment companies and investment advisers consistent with the changes they propose.7 Rule 204–2(g) under the Investment Advisers Act of 1940 sets forth general principles that investment advisers must follow when arranging, accessing and reproducing their records. Similar provisions apply to the operators of investment companies pursuant to Rule 31a–2. In particular, Rule 204–2(g) does not tether advisers to any particular format, i.e., native file format, nor does it require the use of Technical Consultants. The Petitioners note that in the 1999 Amendment the Commission expressly stated its intent to track existing recordkeeping provisions similar to those
adopted by the SEC,8 and that, more recently in 2013, the Commission acknowledged that there are certain advantages to crafting regulations that ‘‘allow the Commission to fulfill its regulatory mandate while, at the same time, avoiding unnecessary regulatory burdens on dually-regulated [entities] with respect to . . . Commission recordkeeping requirements.’’ 9 Accordingly, the Petitioners request that the Commission amend § 1.31 in a manner consistent with SEC Rule 204– 2(g).
II. The Proposal
The Commission noted in the 1999 Amendment the importance of conducting an ongoing review of the standards articulated in the recordkeeping regulation to ensure that the requirements reflect to the extent possible the reality of established technological innovation.10 At the same time, the Commission recognized the value of consultation with the derivatives industry and its participants to determine how to best use available information technology that also is responsive to the Commission’s legitimate need to have access to complete and accurate records when necessary.11 As the Petitioners highlighted, the Commission recognizes that recordkeeping has evolved significantly in the time since the last major revision to § 1.31 in 1999 from a paper-based system to electronically stored information systems that leverage computers, databases, and even cloud computing. Back then, most records were created and maintained on paper, but recordkeepers began to explore better ways to store information electronically. Now the paradigm has shifted, and most information is produced and stored electronically on complex systems tailored to the needs of a given recordkeeper. These advances in information technology may have rendered certain technical elements of § 1.31 obsolete or outdated. Accordingly, the Commission proposes to amend § 1.31 to reorganize and update the existing recordkeeping regulation, eliminating certain outdated provisions while still maintaining the ability of the Commission to examine and inspect required records. The Proposal is intended to be technology neutral so as technology develops the regulation should withstand such changes. The updates include new definitions, deletion of outdated terms, and revision of certain provisions to reflect advances in information technology. The Commission notes that many of the existing provisions and principles in § 1.31 have been retained, albeit in a revised format. The proposed regulation is divided into five subsections: (a) Definitions; (b) regulatory records policies and procedures; (c) duration of retention; (d) form and manner of retention; and (e) inspection and production of regulatory records. A. Regulation 1.31(a): Definitions The Commission proposes to reorganize § 1.31 by revising paragraph (a) to define certain terms to be referenced elsewhere within the revised regulation. Specifically, the Commission proposes to define the terms ‘‘electronic regulatory records’’, ‘‘records entity’’, and ‘‘regulatory records’’. The Commission believes that defining these terms will provide greater clarity regarding the recordkeeping obligations applicable to all persons subject to § 1.31, particularly for those obligations related to electronic records. For the ease of understanding and applying the proposed amendments to § 1.31, the Commission proposes to define ‘‘records entity’’ to mean ‘‘any person required by the Act or Commission regulations to keep regulatory records.’’ The Commission notes that
numerous Commission regulations set forth particular requirements for CEA Section 1a(40) ‘‘registered entities’’—such as derivatives clearing organizations, designated contract markets, swap execution facilities, and swap data
12For example, Part 18 of the Commission’s regulations requires every trader who owns, holds or controls a reportable futures or option to ‘‘keep books and records showing all details concerning all positions and transactions in the commodity swap. . . .’’ 17 CFR 18.05. Traders are not limited to any Commission registrant or registered entity. 13See Supplemental notice of proposed rulemaking, Regulation Automated Trading, 81 FR 85334 (Nov. 25, 2016). 14Records entities who are currently in compliance with current § 1.31 will continue to be in compliance with proposed § 1.31, provided that they have written policies and procedures that meet the requirements of the Proposal. 15See 36 FR 22286 (Nov. 24, 1971) (permitted the use of microfilm as a medium for maintaining certain records); 58 FR 27458 (May 10, 1993) (permitted the use of optical disk and CD–ROM); 64 FR 28735 (May 27, 1999) (permitted the use of other micrographic and electronic storage media). 16See § 1.31(b)(1)(ii)(A). 17Each version of a record must be retained for the applicable retention period which is based off the most recent version. For example, the initial record is created on Day 1 and the amended record is created on Year 4, Day 359. The amended record resets the retention period clock to Day 1 for both the initial record and amended record to ensure a comprehensive audit trail. 18The Commission publishes the CFTC Data Delivery Standards on its Web site at: http:// www.cftc.gov/idc/groups/public/@ lrenforcementactions/documents/file/ enfdatadeliverystandards052716.pdf. The Commission notes that other federal agencies, such as the SEC (https://www.sec.gov/divisions/enforce/ datadeliverystandards.pdf), the Department of Justice (https://www.justice.gov/atr/case-document/ file/494686/download) and the Department of Treasury Office of Foreign Asset Control (https:// www.treasury.gov/resource-center/sanctions/OFACEnforcement/Documents/ofac_data_delivery.pdf) have similar data delivery standards. repositories—and for registrants—such as futures commission merchants, introducing brokers, CPOs, CTAs, floor brokers, floor traders, retail foreign exchange dealers, swap dealers, and major swap participants—to keep certain books and records in accordance with § 1.31. The Commission notes, however, that certain persons that are neither a registered entity nor a registrant may be required to keep certain books and records in accordance with § 1.31, as well.12 The Commission also proposes to replace existing references to ‘‘books and records’’ within § 1.31 with the term ‘‘regulatory records’’ and to differentiate between electronic and paper regulatory records. The Commission proposes to define ‘‘regulatory records’’ to mean ‘‘all books and records required to be kept by the Act or Commission regulations.’’ As a subset, the Commission proposes to define within § 1.31(a) ‘‘electronic regulatory records’’ to mean ‘‘all regulatory records other than paper regulatory records exclusively
created and maintained by a records entity on paper.’’ The Commission has separately proposed Regulation Automated Trading and certain requirements regarding source code and manner of production of source code.13 This proposal does not address source code or the production of source code. The Commission recognizes that certain regulatory records are not created electronically and that certain records entities may elect not to convert any paper regulatory records into an electronic format. By differentiating between paper and electronic regulatory records, the Commission can better preserve existing recordkeeping obligations applicable solely to records entities that do not create anything other than paper regulatory records.14 The Commission also believes that the term ‘‘books and records’’ in the traditional sense may no longer adequately convey that § 1.31 recordkeeping obligations extend to all associated electronic data. However, contrary to prior revisions to § 1.31 where the Commission specifically delineated the types of allowable media for electronic records storage,15 the Commission believes it is now appropriate to focus the recordkeeping obligations on the scope of required records, rather than a specific storage medium. Accordingly, the Commission proposes to further define the term ‘‘regulatory records’’ by adding the following descriptive language to include: 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. The proposed language would more clearly state the existing requirement to maintain all prior versions of any regulatory record, no matter how modified. This is not a new recordkeeping obligation. Since 1993 the Commission has required electronic records to be created and maintained in a non-erasable, non-rewritable format for the retention period.16 Because the existing regulation requires electronic records be preserved exclusively in a non-rewritable, non-erasable format, it follows that each version of an electronic record must be created and maintained in a non-erasable, nonrewritable format. Therefore, the Commission is confirming that both the initial record and all subsequent versions are records within the definition and must be created, maintained, accessible, and produced consistent with the regulation.17 The proposed language also would clarify that electronically stored regulatory records are not limited to the data within a particular database or application, for example, but
includes the electronic information that identifies the manner in which any regulatory record is altered. The Commission understands that this information is more commonly known as ‘‘metadata,’’ and, at its core, is data about data. Regardless of the label, the Commission understands that metadata generally refers to any hidden text, formatting codes, formulae, history, tracking, and other information associated with an electronic file or data. Metadata is integral to the Commission’s ability to carry out both the inspection and investigation functions it is charged with under the CEA. To fully understand the data within a database, for example, requires knowledge of data relationships, what the information represents, and how it was generated. Once properly assembled and formatted in the form of a report, data within a database is readily understandable. The Commission does not find it necessary at this time to define specific, technical terms related to information technology and electronically stored information, such as metadata or databases, as these technical terms may change over time. The Commission believes these are terms generally understood by practitioners notwithstanding a lack of a universal agreement on exact definitions. The Commission notes that the requirement to provide data about data is not new. As set forth in current § 1.31(a)(2), production of any books and records shall be made ‘‘in a form specified by any representative of the Commission.’’ For the purpose of facilitating production requests pursuant § 1.31(a)(2), the Commission’s Division of Enforcement has developed and continually updates a document entitled ‘‘CFTC Data Delivery Standards.’’ 18 Such standards describe the technical requirements for electronic document production to the Commission and specifically provides for the production of metadata associated with electronic records. Finally, the Commission further proposes not to retain within the definition section certain definitions in the existing regulation, such as ‘‘native
19SEC Rule 204–2(a)(17) requires each investment adviser to maintain as part of its recordkeeping obligations, among other things, a copy of the adviser’s policies and procedures, and any records documenting the adviser’s annual review of those policies and procedures. 20 66 FR 53510 (Oct. 23, 2001) (‘‘Rules Relating to Intermediaries of Commodity Interest Transactions’’). With respect to mandatory ethics training, the Commission replaced prescriptive requirements set forth in § 3.34 with a Statement of Acceptable Practices. 21SEC Rule 204–2(e) states that all books and records shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made on such record, the first two years in an appropriate office of the investment adviser. SEC Rule 31a–2 similarly requires the operator of an investment company to retain records for a minimum of six years the first two years in an easily accessible place. file format’’, ‘‘micrographic media’’ and ‘‘electronic storage media.’’ The Commission believes that the proposed revisions to § 1.31, described in greater detail below, obviate the need to retain these defined terms. Request for comment: The Commission requests comment from all interested parties and the general public regarding the proposed definitions in § 1.31(a). The Commission encourages all comments including background information, actual market examples, best practice principles, and estimates of any asserted costs and expenses. Regarding the proposed definitions, the Commission specifically requests comment on the following questions:
22Section 1a(40) of the Act defines a ‘‘registered entity’’ to mean: (a) A board of trade designated as a contract market under section 5; (b) a derivatives clearing organization registered under section 5b; (c) a board of trade designated as a contract market under section 5f; (d) a swap execution facility registered under 5h; (e) a swap data repository registered under section 21; and (f) with respect to a contract that the Commission determines is a significant price discovery contract, any electronic trading facility on which the contract is executed or traded. 23For example, part 20 of the Commission’s regulations sets forth requirements regarding large trader reporting for physical commodity swaps. Regulation 20.1 defines a ‘‘reporting entity’’ to mean a clearing member of a clearing organization or a swap dealer in one or more paired swaps or swaptions. Pursuant to § 20.6, only clearing organizations and reporting entities must keep all books and records in accordance with § 1.31. Any other person who exceeds the reportable level in any contract ‘‘shall keep books and records . . . in the record retention format that such person has developed in the normal course of its business operations.’’ All books and records kept pursuant to § 20.6, however, shall be furnished upon request to any Commission representative. 24With respect to electronic storage media, SEC Rule 204–2(g)(3) requires investment advisers to establish written procedures that: (1) Maintain and preserve the records, so as to reasonably safeguard them from loss, alteration, or destruction; (2) limit access to the records to properly authorized personnel and the SEC; and (3) reasonably ensure that any reproduction of a non-electronic original record on electronic storage media is complete, true, and legible when retrieved. SEC Rule 31a–2(f) sets forth similar requirements for the operators of investment companies. examples, best practice principles, and estimates of any asserted costs and expenses. Regarding the proposed retention periods, the Commission specifically requests comment on the following questions:
25See 46 FR 21 (Jan. 3, 1981); see also, CFTC Letter 77–4 (Apr. 14, 1977). 26See § 1.31(b)(2)(i) and (ii). In addition, persons using electronic storage media must be ready at all times to provide, and immediately provide at the expense of the person required to keep such records, copies of such records on such compatible data processing media as defined in Commission regulation 15.00(d) which any representative of the Commission or the Department of Justice may request. Records must use a format and coding structure specified in the request. See § 1.31(b)(3)(i). 27See § 1.31(a)(2). 28FIA comment regarding proposed amendments to § 1.31. 64 FR 28735 at 28739 (May 27, 1999). 29SEC Rule 17a–1 similarly requires national securities exchanges and registered clearing agencies to ‘‘promptly furnish’’ records to any representative of the SEC upon request. 30See 77 FR at 66298 (referring to the 1999 Amendment). powers.25 Accordingly, the Commission has determined to limit reference to the DOJ in § 1.31 to a single reference in this paragraph. Any requirement for a records entity to produce regulatory records extends to DOJ as is currently the requirement. Request for comment: The Commission requests comment from all interested parties and the general public regarding the proposed regulations set forth in § 1.31(e)(1). The Commission encourages all comments including background information, actual market examples, best practice principles, and estimates of any asserted costs and expenses.
2. Production
The Commission proposes to revise and re-state in new § 1.31(e)(2) the existing production requirement currently set forth in § 1.31(a)(2) and (b). Currently, a records entity is required to produce regulatory records in a form specified by any representative of the Commission, including the DOJ, upon the representative’s request. If the requested book or record is stored either on micrographic media or electronic storage media, production shall be immediate.26 Otherwise, all copies or originals shall be provided promptly.27 The Commission proposes to amend this requirement in new § 1.31(e)(i) and (ii) to differentiate between the production of paper and electronic regulatory records, particularly with respect to the form and medium of requested electronic regulatory records. With respect to the production of regulatory records exclusively created and maintained on paper, proposed § 1.31(e)(2) would require a records entity to produce such regulatory records promptly upon request. With respect to regulatory records other than paper regulatory records, proposed § 1.31(e)(3) would set forth the process by which a records entity must respond to a request from a Commission representative. In particular, § 1.31(e)(3)(i) would require a Commission representative to specify a reasonable form and medium in which a records entity must produce such regulatory records. Proposed § 1.31(e)(3)(ii) would require a records entity, at its own expense, to produce such regulatory records in the form and medium requested promptly, upon request, unless otherwise directed by the Commission representative. The Commission recognizes that production, depending on the records, may require the records entity to engage multiple employees, officers, or directors in order to satisfy the production request, depending upon its size and scope. Historically, Commission staff has exercised broad discretion regarding production schedules and ‘‘typically exhibits flexibility. . . .’’ 28 However, timely production is a Commission priority and the proposed ‘‘prompt’’ standard should not be interpreted as sanctioning any unnecessary delay. It is the Commission’s understanding that most registrants maintain records electronically and therefore would be required under existing § 1.31 to produce said records immediately, subject to the discretion of Commission staff. The prompt production standard is therefore consistent with the existing standard. The Commission notes that the standard ‘‘promptly upon request’’ is also consistent with SEC Rule 17a–4 applicable to broker-dealers thereby maintaining a harmonized standard for entities that may be dually registered with the SEC and the CFTC.29 In adopting this revised regulation, the Commission is cognizant of the need to balance the opportunities for recordkeepers to reduce costs and improve efficiencies regarding recordkeeping systems with the Commission’s need for prompt access to complete and accurate records in a format that the
Commission can process, i.e., a useable format.30 For the purposes of production, the Commission continues to believe that it is not sufficient to simply reduce electronic records to a paper format, i.e., printing out data from a database and saving into a portable document file, or PDF. This type of production detracts from the Commission’s ability to properly evaluate the integrity of the electronic records by accessing the associated metadata, for example. Based upon these principles, the Commission proposes to revise § 1.31 to permit a records entity that cannot promptly produce electronic regulatory records in the form and medium requested by the Commission the opportunity to produce records in an alternative manner sufficient for the Commission to adequately inspect the records. The ultimate goal is not necessarily to obtain records in their ‘‘native file format,’’ but rather in the most useable form and medium. Finally, the Commission further proposes to adopt new § 1.31(e)(4) to preserve the existing right of a records entity to provide a representative of the Commission with an original regulatory record for reproduction by the representative in lieu of a copy currently set forth in § 1.31(a)(2). As with the existing provision, the Commission proposes to require the Commission representative to issue a receipt for the original regulatory record to the records entity upon request. Request for comment: The Commission requests comment from all interested parties and the general public regarding the proposed inspection and production of regulatory records in § 1.31(e). The Commission encourages all comments including background information, actual market examples, best practice principles, and estimates of any asserted costs and expenses. Regarding the production of regulatory records, the Commission specifically requests comment on the following questions:
31 5 U.S.C. 601 et seq.
32See, e.g., Policy Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of the Regulatory Flexibility Act, 47 FR 18618 (Apr. 30,
1982) (futures commission merchants and
commodity pool operators); Leverage Transactions, 54 FR 41068 (Oct. 5, 1989) (leverage transaction merchants); Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, 75 FR 55410, 55416 (Sept. 10, 2010) (retail foreign exchange dealers); and Registration of Swap Dealers and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers and major swap participants). 33See 47 FR at 18620 (commodity trading advisors and floor brokers); Registration of Floor Traders; Mandatory Ethics Training for Registrants; Suspension of Registrants Charged With Felonies, 58 FR 19575, 19588 (Apr. 15, 1993) (floor traders); and Introducing Brokers and Associated Persons of Introducing Brokers, Commodity Trading Advisors and Commodity Pool Operators; Registration and Other Regulatory Requirements, 48 FR 35248, 35276 (Aug. 3, 1983) (introducing brokers). the derivatives industry obviates the need for the Commission to require those records entities electing to store information electronically to engage a third party to ensure compliance with all applicable electronic recordkeeping obligations. However, to the extent that a records entity chose to use a third party or Technical Consultant, the records entity would remain responsible for compliance with the CEA and Commission regulations thereunder.
2. § 1.31(c)—Representation to the
Commission
Consistent with the foregoing amendments and in response to the Petitioners’ request, the Commission proposes to amend § 1.31 by removing existing § 1.31(c). This provision requires any person utilizing electronic storage media to provide a written representation to the Commission prior to the use of the system certifying that the system satisfies the requirements in existing paragraph (b)(1)(ii) and, where applicable, if the system will be using storage media other than optical disk or CD–ROM. Further, the written representation must include an affirmation from an individual consistent with § 1.10(d)(4), i.e., the information provided is true and correct to the best knowledge and belief of the affirming individual. The Commission believes that the requirement set forth in proposed § 1.31(c)(2) regarding written policies and procedures for regulatory records obviates the need for any records entity to provide notice to the Commission regarding its compliance with § 1.31. Moreover, the Commission recognizes that references to optical disks and CD–ROM are outdated.
3. § 1.31(d)—Other Paper Regulatory
Records
Consistent with the foregoing amendments, the Commission proposes to amend § 1.31 by removing current § 1.31(d). This provision states that certain paper records, such as trading cards and paper copies of electronically filed certified forms, must be retained in hard-copy for the required time period. The Commission believes that revised § 1.31 provides records entities with sufficient flexibility on how to retain regulatory records while maintaining the Commission’s ability to access reliable regulatory information. Having eliminated the requirement for a records entity to retain regulatory records in a specific form and manner, the Commission believes that § 1.31(d) no longer serves any regulatory purpose. Request for comment: The Commission requests comment from all interested parties and the general public regarding the proposed deletion of existing provisions in § 1.31(b)(4), (c) and (d); and § 1.35(a)(5)(i). The Commission encourages all comments including background information, actual market examples, best practice principles, and estimates of any asserted costs and expenses.
4. Potential Technical Amendments
In conjunction with the Proposal, the Commission is reviewing its regulations for potential technical amendments related to § 1.31, including those part 4 regulations cited by Petitioners. This review may or may not result in a new proposed rulemaking. Request for comment: The Commission requests comment from all interested parties and the general public regarding potential technical amendments to Commission regulations related to § 1.31. The Commission specifically requests comment whether the proposed changes to § 1.31 will resolve all outstanding issues regarding compliance with part 4 of the Commission’s regulations identified by Petitioners. The Commission encourages all comments including background information, actual market examples, best practice principles, and estimates of any asserted costs and expenses.
III. Related Matters
A. Regulatory Flexibility Act The Regulatory Flexibility Act (‘‘RFA’’) 31 requires Federal agencies, in promulgating regulations, to consider whether the rules they propose will have a significant economic impact on a substantial number of small entities and, if so, to provide a regulatory flexibility analysis regarding the economic impact on those entities. As discussed above, because the Proposal relates to most recordkeeping obligations under the CEA and the Commission’s regulations, it may affect the full spectrum of Commission registrants, all persons required to register but not registered with the Commission, and certain persons that are neither registered nor required to register with the Commission. The Commission has previously determined that certain registrants are not small entities for purposes of the RFA and, therefore, the requirements of the RFA do not apply to those entities.32 For other registrants, however, the Commission has found it appropriate to consider whether such registrants should be deemed small entities for purposes of the RFA on a case-by-case basis, in the context of the particular Commission regulation at issue.33 As certain persons affected by the Proposal, including Commission registrants, may be small entities for purposes of the RFA, the Commission considered whether this rulemaking would have a significant economic impact on any such persons. As discussed above, the Proposal generally updates and simplifies existing Commission regulation 1.31 with new provisions that safeguard the same statutory-based principles previously identified by the Commission. It accomplishes this by deleting outdated terms and revising provisions to reflect advances in information technology, allowing records entities to benefit from evolving technological developments while maintaining necessary safeguards to ensure the reliability of the recordkeeping process. The Commission believes that the proposed rules would impose only limited additional costs on small entities related to the requirement that they establish written recordkeeping policies and procedures. However, this new requirement is replacing existing requirements applicable to such persons in many cases, including the existing similar requirements discussed above to (i) Maintain an audit system and (ii) under certain circumstances, retain a Technical Consultant. Further, as part of the Proposal, the Commission is proposing to remove existing requirements that are expected to lower costs for all records entities, including small entities, by removing requirements that certain records be kept in paper form. In light of the limited scope of the proposed changes and the added flexibility and expected cost-savings provided to small entities thereby, the Commission does not expect small entities that are records entities to incur
34 44 U.S.C. 3501 et seq.
35See OMB Control No. 3038–0090, http:// www.reginfo.gov/public/do/PRAOMBHistory?omb ControlNumber=3038-0090# (last visited Sep. 20, 2016). 36With respect to registrants and registered entities, these numbers are based on the number of such persons so registered with the Commission as of November 2, 2016. With respect to the number of unregistered members of designated contract markets or swap execution facilities, see Agency Information Collection Activities: Proposed Collection Revision, Comment Request: Final Rule for Records of Commodity Interest and Related Cash or Forward Transactions, 80 FR 80327 (Dec. 24, 2015). 37This burden hour estimate reflects the Commission’s assumption that many records entities already have policies and procedures that, in whole or in part, satisfy the proposed recordkeeping policies and procedures requirement. 38The Commission will also submit to OMB revisions to Collection 3038–0090 to reflect the Proposal’s replacement of the audit system requirements in current Commission regulation
1.31. 39 7 U.S.C. 19(a).
new costs, on a net basis, as a result of the Proposal. Consequently, the Commission finds that no significant economic impact on small entities will result from the Proposal. Accordingly, the Chairman, on behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the Proposal will not have a significant economic impact on a substantial number of small entities. B. Paperwork Reduction Act
the same time, the Commission preliminarily believes that the Proposal would also reduce current recordkeeping costs under Commission regulation 1.31, because the Proposal would increase flexibility provided to records entities and also eliminate certain requirements as described above (e.g., removing the requirements to have an audit system, to maintain electronic records in limited specified formats, and to retain a Technical Consultant).
2. Benefits
The Commission is committed to reviewing its regulations to ensure they keep pace with technological developments and industry trends, and reduce regulatory burden. The Commission believes that the Proposal will allow records entities to benefit from evolving technology while maintaining necessary safeguards to ensure the reliability of the recordkeeping process. By deleting outdated terms and revising provisions to reflect advances in information technology, the Proposal will allow records entities to utilize a wider range of currently available technology than previously allowed and remove requirements that the Commission believes are now obsolete, allowing records entities to reduce their costs. In addition, the Commission believes that the flexibility provided by the Proposal will, without further Commission rulemaking, allow records entities to adopt new technologies as such technologies evolve, allowing such persons to reduce their future costs. Moreover, the Commission expects that the added flexibility provided by the Proposal will encourage records entities to utilize electronic storage rather than maintain paper regulatory records. The Commission expects that this conversion will benefit the Commission, the DOJ, and the commodity interest industry, generally, by making the universe of regulatory records more accessible and searchable. In addition, as a result of the Proposal codifying industry practices to require recordkeeping policies and procedures and, in doing so, providing records entities with an opportunity to examine their own recordkeeping practices, the Commission expects that records entities may improve the quality of such practices and, thus, the accuracy and integrity of their regulatory records.
3. Section 15(a) Factors
Section 15(a) of the CEA requires the
Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders. CEA
Section 15(a) further specifies that the
costs and benefits shall be evaluated in light of five broad areas of market and public concern: (i) Protection of market participants and the public; (ii) efficiency, competitiveness, and financial integrity of futures markets; (iii) price discovery; (iv) sound risk management practices; and (v) other public interest considerations.
i. Protection of Market Participants and
the Public
The Proposal will continue to protect the public by maintaining necessary safeguards to ensure the reliability of the recordkeeping process while allowing records entities to benefit from evolving technology.
ii. Efficiency, Competitiveness, and
Financial Integrity of Markets As discussed above, the Proposal may increase resource allocation efficiency by improving the way in which records are maintained. Otherwise, the Commission anticipates minimal change to the efficiency, competitiveness, and financial integrity of the markets.
iii. Price Discovery
The Commission believes that the Proposal may increase confidence and participation in the markets for the reasons discussed above. Nevertheless, the Commission does not anticipate a significant increase in liquidity or a significant improvement in price discovery as a result of this rulemaking.
iv. Sound Risk Management Practices
By improving recordkeeping policies and procedures, the Proposal may encourage records entities to analyze their recordkeeping practices and create or update policies and procedures related thereto.
v. Other Public Interest Considerations
The Commission has not identified any additional public interest considerations.
4. Request for Comments
The Commission invites public comment on its cost-benefit considerations, including the Section 15(a) factors described above. Commenters are also invited to submit any data or other information that they may have quantifying or qualifying the costs and benefits of the Proposal with their comment letters. The Commission specifically seeks comment on the following:
(ii) Any data necessary to access, search, or display any such books and records. (b) Regulatory records policies and procedures. Each records entity shall establish, maintain, and implement written policies and procedures reasonably designed to ensure that the records entity complies with its obligations under this section. Such policies and procedures shall provide for, without limitation, appropriate training of officers and personnel of the records entity regarding their responsibility for ensuring compliance with the obligations of the records entity under this section, and regular monitoring for such compliance. (c) Duration of retention. Unless specified elsewhere in the Act or Commission regulations in this chapter:
(1) A records entity shall keep regulatory records of any swap or related cash or forward transaction (as defined in § 23.200(i) of this chapter), other than regulatory records of oral communications, from the date the regulatory record was created until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction and for a period of not less than five years after such date. (2) A records entity that is required to retain oral communications, shall keep regulatory records of oral communications for a period of not less than one year from the date of such communication. (3) A records entity shall keep each regulatory record other than the records described in paragraph (c)(1) or (2) of this section for a period of not less than five years from the date on which the record was created. (4) A records entity shall keep regulatory records exclusively created and maintained on paper readily accessible for no less than two years. A records entity shall keep electronic regulatory records readily accessible for the duration of the required record keeping period. (d) Form and manner of retention. Unless specified elsewhere in the Act or Commission regulations in this chapter, all regulatory records must be created and retained by a records entity in accordance with the following requirements:
(1) Generally. Each records entity shall retain regulatory records in a form and manner that ensures the authenticity and reliability of such regulatory records in accordance with the Act and Commission regulations in this chapter. (2) Electronic regulatory records. Each records entity maintaining electronic regulatory records shall establish appropriate systems and controls that ensure the authenticity and reliability of electronic regulatory records, including, without limitation:
(i) Systems that maintain the security, signature, chain of custody elements, and data as necessary to ensure the authenticity of the information contained in electronic regulatory records and to monitor compliance with the Act and Commission regulations in this chapter; (ii) Systems that ensure the records entity is able to produce electronic regulatory records in accordance with this section, and ensure the availability of such regulatory records in the event of an emergency or other disruption of the records entity’s electronic record retention systems; and (iii) The creation and maintenance of an up-to-date inventory that identifies and describes each system that maintains information necessary for accessing or producing electronic regulatory records. (e) Inspection and production of regulatory records. Unless specified elsewhere in the Act or Commission regulations in this chapter, a records entity, at its own expense, must produce or make accessible for inspection all regulatory records in accordance with the following requirements:
(1) Inspection. All regulatory records shall be open to inspection by any representative of the Commission or the United States Department of Justice. (2) Production of paper regulatory records. A records entity must produce regulatory records exclusively created and maintained on paper promptly upon request of a Commission representative. (3) Production of electronic regulatory records. (i) A request from a Commission representative for electronic regulatory records will specify a reasonable form and medium in which a records entity must produce such regulatory records. (ii) A records entity must produce such regulatory records in the form and medium requested promptly, upon request, unless otherwise directed by the Commission representative. (4) Production of original regulatory records. A records entity may provide an original regulatory record for reproduction, which a Commission representative may temporarily remove from such entity’s premises for this purpose. Upon request of the records entity, the Commission representative shall issue a receipt for any original regulatory record received. At the request of a Commission representative, a records entity shall, upon the return thereof, issue a receipt for the original regulatory record returned by such representative.
PART 23—SWAP DEALERS AND
MAJOR SWAP PARTICIPANTS
(b) * * * (1) The records required to be maintained by this chapter shall be maintained in accordance with the provisions of § 1.31 of this chapter, except as provided in paragraph (b)(3) of this section. All such records shall be open to inspection by any representative of the Commission, the United States Department of Justice, or any applicable prudential regulator. Records relating to swaps defined in section 1a(47)(A)(v) shall be open to inspection by any representative of the Commission, the United States Department of Justice, the Securities and Exchange Commission, or any applicable prudential regulator.
Issued in Washington, DC, on January 12, 2017, by the Commission. Christopher J. Kirkpatrick, Secretary of the Commission. NOTE: The following appendices will not appear in the Code of Federal Regulations.
Appendices to Recordkeeping— Commission Voting Summary and Chairman’s Statement
Appendix 1—Commission Voting
Summary
On this matter, Chairman Massad and Commissioners Bowen and Giancarlo voted in the affirmative. No Commissioner voted in the negative.
Appendix 2—Statement of Chairman
Timothy G. Massad
I have said many times that it is important for the CFTC to ensure its rules are up-to-date in light of technological changes, as outdated rules can create unnecessary burdens. That is why I’m pleased we are unanimously issuing this proposed rulemaking, which is in keeping with that goal. Today’s proposal will modernize recordkeeping and storage obligations set forth in CFTC rules, and make them technology neutral. By doing so, it will reduce costs for businesses and improve the quality of record preservation and production. Among other things, the proposal will provide greater flexibility when it comes to how records must be retained and produced. In this age where terabytes of storage easily fit in one’s pocket, our rules should not refer to microfiche or require paper records. Today’s proposal is also an example of how the Commission is focusing on issues related to technological change generally in our markets. In this regard, there is much talk today about innovations that may come from financial technology. While it is the role of the private sector to develop innovations, I believe it is our role to ensure that the Commission’s rules do not stand in the way of their potential. Today’s proposal is a way to do just that. I thank the CFTC staff for their work on this proposal and my fellow Commissioners for their support. [FR Doc. 2017–01148 Filed 1–18–17; 8:45 am] BILLING CODE 6351–01–P
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