My Crypto Lawyer
Thank you, Mr. Chair. Today’s proposal represents an important step in the Commission’s welcome transition from paper to electronic filing requirements, and I support it. Digital technologies have transformed our world over the past several decades, and our markets are no exception: From internal and external communications, to books and records, to the routing and matching of orders, these technologies have contributed to making the markets more efficient, faster moving, and more accessible to investors.
Because our rules have not always kept pace with these developments, regulated entities have had to rely on antiquated methods to meet various regulatory obligations.[1] Paper filings, even if scanned and submitted by email, can be cumbersome for firms to prepare and for investors and regulators to use. Making data reported on paper forms available for investors to conduct cross-firm or market-wide analyses can require substantial, often intensive, manual effort, which can result in significant delays and the inadvertent introduction of errors into the data. Today’s proposal would move a number of forms to electronic formats, which should reduce compliance burdens for, and increase information availability, usability, and reliability in connection with, a broad range of Commission registrants. I welcome these changes.
I am concerned about registrants’ ability to devote the necessary attention to this highly technical release. Registrants overseen by the Division of Trading and Markets have been flooded with proposals over the past two years, and today’s proposal addresses a wide swathe of the Commission’s regulations. We want to get these changes right, and we need commenters’ help, but commenters are overwhelmed at the moment.
I hope to get comment on several specific issues. First, this proposal contains some substantive changes, including with respect to where certain information is to be published and what information is to be included in certain filings.[2] Registrants should not simply assume that this release represents nothing more than a transition from paper to electronic filing. The Commission needs your input on changes to the filings that you are required to make under these rules, and I hope you will provide us with that input, even as I recognize that you have precious little time to do so.
Second, we are proposing a significant increase in the use of structured data. Market participants increasingly rely on structured data to facilitate financial and market analysis, but I have concerns about overly prescriptive Commission-mandated standards in this area, which could become obsolete faster than the Commission can update its requirements.[3] The proposed amendments that would require the submission of structured data generally specify that registrants use either custom XML or Inline XBRL. Although these choices appear reasonable given current technology and practices in the financial markets, is it prudent or necessary to embed this level of specificity in our rule text? We at the Commission may not be able to envision future technological developments that would render these standards obsolete, but history suggests that those advances will eventually appear, whether in the form of a more advanced tagging system or, perhaps, of an AI capable of extracting any data an analyst requests. Indeed, the Commission has seen unexpected technological developments render its rules out-of-date in the past and no doubt will do so again in the future.[4] For example, a more general standard—such as one specifying only that the information be filed in a format that is both machine- and human-readable[5]—might be appropriate for certain filings. If further specificity is warranted, the rules could provide that the Commission or its staff may specify, from time to time, standards as appropriate for particular types of filings. Either approach would have the advantage of permitting greater flexibility for market participants and the Commission to respond to future developments in the way analysts and others use financial data.
I also hope that commenters will tell us whether this proposal gets the balance between costs and benefits right. Does the proposal appropriately draw the line between where structured data is appropriate and beneficial and where it would provide little benefit? In several cases, the proposal would require filers to use structured data for non-public filings, meaning that the public will not benefit directly from those requirements. Do commenters believe that convenience to the Commission in its internal use of the data warrants the expense that filers may bear in structuring the information they are required to report? Finally, have we made the right decisions in prescribing what markup language should be used for particular types of data?
Thank you, David, Ray, and Jessica for your presentations, and thank you to staff of the Division of Trading and Markets, the Division of Economic and Risk Analysis, and throughout the Commission for your work on this release.
[1] See Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants (“Electronic Recordkeeping Release”), Rel. No. 34-96034, 87 Fed. Reg. 66412 (Nov. 3, 2022) (adopting rules providing an alternative to the long-standing, technologically obsolete write-once-read-many requirement for broker-dealer records).
[2] See, e.g., Electronic Submission of Certain Materials Under the Securities Exchange Act of 1934; Amendments Regarding the FOCUS Report at 79-82 (describing proposal to rescind Form 19b-4(e) and instead requiring SROs to post information currently contained on such forms to their websites); id. at 89-94 (describing proposal to require clearing agencies to post supplementary materials to their websites rather than file with the Commission under Exchange Act Rule 17a-22); id. at 145-52 (describing various corrective, clarifying, and harmonizing amendments to FOCUS Reports). The proposal would also amend Exchange Act Rule 3a71-3 to require a firm no longer relying on the arrange, negotiate, execute (ANE) exception to the de minimis counting requirement under the security-based swap dealer definition to file a notice of withdrawal. See id. at 128-29.
[3] See Commissioner Hester M. Peirce, Worms and Dinosaurs: Statement on the Proposed Amendments to Modernize How Broker-Dealers Preserve Electronic Records (Nov. 19, 2021) (“Technology changes faster than regulations do.”).
[4] For example, Exchange Act Rule 17a-11 provided for the submission of notices and reports to the Commission by telegraphic transmission until 2019. See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers, Rel. No. 34-87005, 84 FR 68550, 68590 (Dec. 16, 2019) (removing this provision “in light of the fact that telegrams are no longer widely used in the United States, and that Commission staff no longer receive 17a-11 notices by telegram”).
[5] There is precedent for such an approach. Last year, the Commission amended Exchange Act Rule 17a-4 to permit broker-dealers to dispense with the outdated write-once-read-many recordkeeping requirement and instead use a record and corresponding “audit trail (if applicable) in both a human readable format and in a reasonably useable electronic format.” See Electronic Recordkeeping Release, 87 Fed. Reg. at 66419.
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