HSBC Securities (USA), Inc. agreed to pay a fine of US $1.5 million to settle charges brought by the Financial Industry Regulatory Authority that, from May 2003 through the present, it did not maintain order records related to approximately 12.36 million transactions in a non-erasable and non-rewritable format known as “WORM.” The transactions involved exchange traded funds, equities and fixed income products, alleged FINRA. Under applicable Securities and Exchange Commission rule, broker-dealers using electronic means to store records must preserve such records in WORM format. Moreover, broker-dealers using electronic storage media must advise their examining authority of their intent to use such media at least 90 days in advance; have an audit system to monitor the inputting of new records and changes to old records; and retain a third-party vendor to provide required electronic records to the SEC, FINRA and other regulatory authorities if the broker-dealer is unable to do so and to obtain an attestation from such vendor regarding its agreement. (Click here to access the SEC’s requirement regarding acceptable electronic storage media at 17 CFR 240.17a-4(f).) FINRA claimed that HSBC Securities violated these provisions too, and did not maintain adequate supervisory systems reasonably designed to achieve compliance with its recordkeeping obligations. At the end of 2016, FINRA assessed a total of US $14.4 million in fines against 12 other firms for “significant deficiencies” in their retention of required books and records on electronic storage media. (Click here for background in the article “FINRA Sanctions 12 Member Firms for Failure to Maintain Electronic Records in Required Format” in the January 8, 2017 edition of Bridging the Week.)
Compliance Weeds: In May 2017, the Commodity Futures Trading Commission approved a revised records retention rule that aims to eliminate many existing antiquated requirements and to be “technology neutral” in order to accommodate future advances in recordkeeping technology. Among other things, the revised rule will eliminate the existing requirement that electronic records be maintained in WORM format. Instead, the revised rule is more principles-based and solely requires that all “regulatory records” be maintained in a way that “ensures the authenticity and reliability of such regulatory record” in accordance with applicable law and CFTC regulations. (For background, click here to access the article “Principles-Based Rules Rule in CFTC Recordkeeping Rule Amendment “ in the June 4, 2017 edition of Bridging the Week.) The CFTC’s amended recordkeeping rule is effective August 28 (click here to access). As recommended by the Futures Industry Association, the SEC should also consider adopting equivalent modernized recordkeeping requirements for broker-dealers (click here to access the relevant FIA recommendation; see bottom of page 2).