BOK Financial Securities, Inc., a registered broker-dealer with the Securities and Exchange Commission, agreed to settle charges brought by the Financial Industry Regulatory Authority that, from September 2010 through December 2016, it failed to maintain electronic brokerage records in a non-erasable, non-rewritable “WORM” format. FINRA alleged that BOK failed to keep 732,000 records in WORM format during this time, as required. In addition, alleged FINRA, the firm failed to maintain an audit system for the input of electronic records and did not have adequate written supervisory procedures related to record retention. BOK agreed to pay a fine of US $175,000 to resolve FINRA’s charges.
Compliance Weeds and My View: Earlier this year, the Commodity Futures Trading Commission amended its recordkeeping requirements to eliminate many existing antiquated requirements and to be “technology neutral” in order to accommodate future advances in recordkeeping technology. Among other things, the amended rule eliminated the then prevailing requirement that:
- electronic records be maintained in their native file format and preserved exclusively in a non-rewritable, non-erasable format (commonly referred to as write once, read many or “WORM”) and
- records holders use a third-party technical consultant to provide certain representations to the Commission regarding access to a record holder’s required electronic records.
Instead, the amended rule 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. (Click here for background in the article, "Principles-Based Rules Rule in CFTC Record Keeping Rule Amendment" in the June 4, 2017 edition of Bridging the Week.) The CFTC's revised recordkeeping rule was effective August 28.
Contrariwise, the SEC continues to maintain recordkeeping requirements parallel to the historic, technical requirements that the CFTC eliminated, and which reflect practices and a protocol of a pre-digital time. (Click here to access the SEC’s requirement regarding acceptable electronic storage media at 17 CFR 240.17a-4(f).)
Moreover, FINRA continues routinely to fine members for violating these antiquated requirements. (Click here for background in the article “Two More Broker-Dealers Sanctioned by FINRA for Recordkeeping Violations” in the July 16, 2017 edition of Bridging the Week.)
Even if FINRA members are CFTC registrants and authorized to maintain records related to their CFTC-overseen activities in accordance with the Commission’s recently amended requirements, they must maintain records related to their SEC-regulated conduct strictly in accordance with SEC requirements.
The SEC should adapt its requirements to reflect current recordkeeping practices.