As you may remember from our earlier post on the subject, under SEA Rules 17a-3 and 17a-4, a broker-dealer is required to make and keep books and records relating to its business and may maintain and preserve records by means of “electronic storage media.” The Securities and Exchange Commission (SEC) recently released guidance in response to a letter received from FINRA regarding contractual arrangements between broker-dealers and third-party recordkeeping service providers – more specifically, contractual arrangements that include provisions permitting the third-party recordkeeping service providers to delete or discard the broker-dealer’s records, typically due to non-payment by the broker-dealer of fees due under the contract. FINRA recapped the guidance received from the SEC in its Regulatory Notice 18-31.
Undertaking Requirements
In the guidance, the SEC staff stated that SEA Rule 17a-4(i) provides that, if the records a broker-dealer is required to preserve pursuant to SEA Rules 17a-3 and 17a-4 are prepared or maintained by
- an outside service bureau,
- a depository,
- a bank (if said bank does not operate pursuant to paragraph (b)(2) of Rule 17a-3), or
- another recordkeeping service
(each referred to in the guidance as a “service provider”), the service provider shall file a written undertaking with the SEC. This undertaking must be in a form acceptable to the Commission and signed by a duly authorized person, and it must attest that such records 1) are the property of the broker-dealer required to preserve such records and 2) shall be surrendered promptly upon request from the broker-dealer.
The SEC staff also stated that the service provider must undertake that, with respect to any books and records preserved on behalf of the broker-dealer, the service provider will permit examination of such books and records by representatives or designees of the SEC, at any time or from time to time during business hours. The service provider must also promptly furnish to the SEC or its designee true, correct, current, and complete hard copy of any, all, or any part of such books and records.
Accessibility of Records
Additionally, the SEC staff stated that the Commission adopted paragraph (i) of Rule 17a-4 to assure the accessibility of broker-dealer records in situations where, for example, a service bureau refuses to surrender the records due to non-payment of fees. The SEC staff further stated that in adopting paragraph (i), the Commission emphasized that the records of a broker-dealer must be available at all times for examination to assure the protection of customers.
Prior to adopting paragraph (i), the SEC found that in situations where a broker-dealer or its service providers were experiencing financial difficulty, the records of the broker-dealer have not always been available to the broker-dealer or to the SEC. Accordingly, the SEC staff stated, contractual provisions that would allow a service provider to, among other things, delete or discard records in the event of non-payment are inconsistent with the retention requirements of SEA Rule 17a-4 and the undertaking requirements of paragraph (i) of Rule 17a-4.
Moreover, the SEC staff stated that if a service provider does delete or discard broker-dealer records in a manner inconsistent with the retention requirements of Rule 17a-4, such action not only would constitute a primary violation of the rule by the broker-dealer but may also subject the service provider to secondary liability for causing or aiding and abetting the violation.
Conclusion
With the release of this guidance, firms that use third-party recordkeeping service providers should review their contracts for compliance with the SEC’s statements.
For the full text of the SEC’s statement, see Third-Party Recordkeeping Services under Rule 17a-4. Additional guidance can be also be found in FINRA Regulatory Notice 18-31.
