On April 12, the staff of the Securities and Exchange Commission issued a letter in response to an inquiry from staff of the Financial Industry Regulatory Authority, concerning broker-dealers’ recordkeeping obligations under Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-4 thereunder.
Paragraph (i) of Rule 17a-4 imposes various requirements on broker-dealers that use third-party recordkeeping services to prepare or maintain records that the broker-dealer is required to preserve under Rules 17a-3 or 17a-4. The requirements are designed to assure that regulators have access to the broker-dealer’s records even where, for example, the third-party recordkeeping service refuses to surrender the records due to non-payment of fees. FINRA staff raised concerns regarding broker-dealers entering into contracts with such third-party recordkeeping services that include provisions permitting the service provider to delete or discard the broker-dealer’s records due to non-payment or under other circumstances.
In response, the SEC staff advised that such contractual provisions are inconsistent with the record retention requirements of Rule 17a-4 and with the service provider provisions in paragraph (i) of the Rule. Moreover, the staff indicated that the deletion of required records by a third-party service provider, exercising its rights under such a contractual provision, would constitute a primary violation of the Rule by the broker-dealer and could subject the service provider to secondary liability for aiding and abetting the violation.
The SEC staff’s letter is available here.