The U.S. Commodity Futures Trading Commission (the “CFTC”) recently approved amendments to CFTC Rule 1.31 and related rules, which set forth recordkeeping requirements for persons required to keep records under the Commodity Exchange Act (the “CEA”), including commodity pool operators and commodity trading advisors. Amended CFTC Rule 1.31 (the “Amended Rule”) updates and modernizes the rule’s record retention and production requirements. Certain key aspects of the Amended Rule, which becomes effective on August 28, 2017, are discussed below. The Amended Rule does not impose any new recordkeeping requirements. Rather, it revises the form and manner in which regulatory records must be kept.
More Flexible Approach to Record Retention
Under the Amended Rule, persons subject to the CEA’s recordkeeping rules will have greater flexibility in retaining and producing regulatory records under a less prescriptive, principles-based approach. Specifically, the Amended Rule requires such persons to preserve records “in a form and manner that ensures the authenticity and reliability of such regulatory records” and “establish appropriate systems and controls that ensure the authenticity and reliability of electronic regulatory records.”
Native File Format Requirement
The Amended Rule eliminates the requirement for entities to keep electronic records in their native file format.
Write Once, Read Many (WORM) Requirement
The Amended Rule removes the requirement that entities maintain electronic records in a non-rewritable, non-erasable WORM format.
Third-Party Technical Consultant Requirement
Under the Amended Rule, persons subject to the CEA’s recordkeeping rules will no longer be required to engage a third-party technical consultant or have the consultant file certain representations with the CFTC regarding access to electronic records.
Proposed “Chain of Custody” Requirement
The Amended Rule removes the phrase “chain of custody elements” from the originally proposed requirement to establish “systems that maintain the security, signature, chain of custody elements, and data as necessary to ensure the authenticity of the information contained in the electronic regulatory records.” However, the Amended Rule does not change the general requirement to maintain a comprehensive audit trail for all electronic records.
S&K Observations
While the Amended Rule’s modernized approach eases the burden of satisfying the CEA’s recordkeeping requirements, persons subject to the CEA’s recordkeeping rules should nonetheless take care to ensure compliance with the new rules. Additionally, dual registrants should note that the Amended Rule may differ from the recordkeeping requirements of other regulators and self-regulatory organizations. Seward & Kissel Regulatory Compliance, or SKRC, provides comprehensive compliance consulting services to assist commodity pool operators and commodity trading advisors with their recordkeeping and other regulatory obligations.
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Seward & Kissel Regulatory Compliance (SKRC) offers comprehensive compliance consulting services. Please contact any of the attorneys listed below to learn more about SKRC.
