Is your small broker-dealer drowning in boxes and boxes of paper? Do you cringe every time you think of storing yet another 50+ page document? Are you interested in exploring the benefits of cloud-based storage? If you answered “yes” to any of these questions, you must first consider your firm’s regulatory requirements for electronic storage media.
Staying Compliant with the SEC and FINRA
There are a few challenges to going paperless. The first is finding a vendor that is compliant with SEC and FINRA electronic storage media requirements. Often, firms can find a cloud-based vendor, but the vendor might have no experience in the financial service sector. Furthermore, the vendor might be unable to provide the firm with the proper notifications required to store and maintain the data.
SEA Rules 17a-3 and 17a-4 state that records can be stored electronically, but the firm must provide the designated examining authority (“DEA”) with both a notification and a representation that the following conditions are met:
- Proper firm notification to the DEA 90 days prior to first use;
- Verification that the records are stored exclusively in a non-rewriteable and non-erasable format, are readily retrievable, and contain the ability to verify data accuracy;
- An audit system to verify document dates of data input and changes;
- The ability to provide all information needed to download stored records and indexes;
- A third-party undertaking (exactly as specified in SEA Rule 17a-4(f)(3)(vii)) provided to the DEA, noting the third party’s ability to provide access to all stored records (the third-party vendor that the firm hires must also be able to provide this documentation);
- Available retrieval facilities to access, read, produce, or download the media;
- Exact enlargement capabilities if the record is scaled down by size;
- Duplicate copies stored separately from the original; and
- Organization and index capabilities with the ability to have the information available for inspection to any SEC and SRO staff.
Vendor Due Diligence and Oversight
Firms have the continued responsibility to oversee, supervise, and monitor the recordkeeping performance service providers. Paying a vendor to perform the service, without proper due diligence and monitoring, has set many firms up for failure, fines, and enforcement. It might also be beneficial to refresh your memory on the SEC’s guidance last year regarding the contractual arrangements between broker-dealers and third-party recordkeeping service providers.
A Strategic Transition to Electronic Storage
The next challenge is the transition to paperless storage. Whether the firm decides to upload existing files or only upload newly created files, the firm must create a plan to implement the move to paperless. Finally, without proper training, policies, and procedures that are consistently followed by all employees, many firms are not able to fully implement the goal. Even worse, books and records may be inadvertently destroyed or lost without proper training on the processes. Careful consideration of all aspects of the firm’s switch to electronic storage and mapping out the policies and processes before implementation is essential for a smooth and successful transition.
Please contact our team to learn more about our expert consulting in this area.