SEC and FINRA Issue Guidance on Third-Party Recordkeeping Services

October 5, 2018

On August 12, 2018, the Securities and Exchange Commission (“SEC”) sent a clarification letter to the Financial Industry Regulation Authority (“FINRA”) with respect to broker-dealers using a third-party recordkeeping service (“service provider”) to preserve records pursuant to Exchange Act Rules 17a‑3 and 17a‑4.

In September 2018, FINRA published Regulatory Notice 18-31 (“RN 18-31”), which summarizes the SEC letter.

Before issuing RN 18-31, FINRA voiced concerns to the SEC regarding broker-dealers that entered into contracts with service providers that permit the provider to delete or discard the broker-dealers’ required records. Most often, the deletion of records would occur in circumstances where the broker-dealer had not paid fees that were due to the provider under the agreement.

Pursuant to Rule 17a‑4, the SEC requires service providers to file a written undertaking with the SEC stating that the required records they maintain for firms are the broker-dealers’ property and will be surrendered promptly upon the broker-dealers’ request.

As FINRA notes in RN 18-31, the SEC has indicated that, should a service provider delete or discard a broker-dealer’s records in a manner inconsistent with Rule 17a‑4 retention requirements, the broker-dealer would be in violation of the books-and-rules retention rules. The service provider may also be subject to secondary liability for causing or aiding and abetting the violation.

FINRA advises firms that use third-party service providers to maintain or preserve their records to review their contracts with such providers in order to identify if there are provisions within the agreements that would not comply with the SEC guidance.

For More Information

For more information on RN 18-31, please contact your ACA representative or Dee Stafford at (561) 628-5288 or dstafford@acacompliancegroup.com.