Broker-Dealer Recordkeeping Compliance – SEC Rule 17a-3 and 17a-4

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The SEC Rules 17a-3 and 17a-4 are two of the most significant regulations enacted by the U.S. Securities and Exchange Commission (SEC) and are being promoted by the Financial Industry Regulatory Authority (FINRA). In combination, Rules 17a-3 and 17a-4 require broker-dealers to create and preserve in an easily accessible manner, a comprehensive record of each securities transaction they effect – including copies of trade blotters, asset and liability ledgers, customer account ledgers, order tickets, trade confirmations, canceled checks and more.

Who is required to comply?

All persons engaged in trading securities as a broker or dealer, and persons associated with the business.

What are the compliance requirements for archiving electronic records?

The advancements in communication technology have forced the SEC to make amendments within Rule 17a-3 and 17a-4. As amended in 1977, the Rule 17a-4 requires that a broker-dealer employ electronic recordkeeping, and may use any digital storage platform that strictly prohibits overwriting or erasure of their records (Write Once Read Many) for a required retention period of not less than six years.

All records must also be time-stamped with a unique and sequential identification number, organized and indexed correctly, with duplicate copies stored separately from the originals. Indexes should also be duplicated and stored independently from the original index.

In April 2017, FINRA released a new notice regarding the use of text messaging and social media communications in financial firms. According to FINRA’s new notice, if your firm “ … intends to communicate, or permits its associated persons, to communicate, with regard to its business” via text messaging, “it must first ensure that it can retain records of those communications as required by SEA Rules 17-a3 and 17a-4 and FINRA Rule 4511.”

What are the compliance requirements for communications with the public?

A new paragraph of Rule 17a-3 requires each firm to archive records documenting that the firm has complied with, or adopted policies and procedures reasonably designed to establish compliance with, relevant federal regulations and SRO rules. This new provision requires that a principal/authority must approve any advertisements, sales literature, or other communications by the financial organization with the public.

Some examples of public communications used by broker-dealers which must be archived and examined include any marketing materials, sales scripts, audio or visual records, and any electronic or social media records.

What is the cost of non-compliance?

Firms who fail to abide by these requirements and enforce the adequate policies and procedures are at risk to non-compliance penalties. Below are the monetary and non-monetary fines with regards to failing to comply with these recordkeeping requirements of SEC and FINRA.

A. Monetary Sanction:

  • Fine of $1,000 to $15,000.
  • Where aggravating factors predominate, consider a fine of $10,000 to $146,000.
  • Where significant aggravating factors predominate, consider a higher fine.

B. Non-Monetary Sanctions

  • Responsible Individual – Consider suspending the accountable individual in any or all capacities for a period of 10 business days to three months. Where aggravating factors predominate, consider a longer suspension (of up to two years) or a bar.
  • The firm – Where aggravating factors predominate, consider suspending the company for a period of 10 business days to two years, or consider the expulsion of the company.

What is the significance of SEC 17a-3 and 17a-4?

These requirements are integral to the Commission’s investor protection function because the preserved records are the primary means of monitoring compliance with applicable securities laws, including antifraud provisions and financial responsibility standards. Recent events of non-compliance involving the deletion of electronic records such as text messages by broker-dealers have confirmed the need to have measures in place to protect record integrity.

Industry Best Practices

  • FINRA officials often suggest to financial firms to separate personal and business communications, g., text messages by requiring associated persons to use separate messaging applications for business and private communications.
  • As more and more financial firms have a presence on social media, FINRA also advises firms to create a detailed social media policy in place. That policy should cover all aspects of social media communication – from which persons are authorized to update the company’s profile to the methods of archiving social media inquiries and complaints from their clients.
  • Establish supervision requirements that include registered principals/authorities to monitor real-time client communications on interactive forums like Twitter and Facebook posts.

TeleMessage offers our Mobile Archiver that can help financial services leaders to efficiently capture and retain electronic data and content including enterprise SMS, emails, and web and social media content, concerning compliance with the archiving requirements of FINRA and SEC. Our archiving solution is equipped with versioning, and robust governance capabilities that ensure content across all digital channels is compliant and meets global regulatory requirements.

Contact us today to learn more about our enterprise messaging solutions.

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