SEC Rules 17a-4 and 17a-3 Explained

Demystify SEC Rules 17a-4 and 17a-3 with our comprehensive guide tailored for financial advisors. Gain clarity on compliance requirements, best practices, and practical insights to ensure regulatory adherence, brought to you by Global Relay.

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20 February 2024 6 mins read
by Jennie Clarke

Charting a course through compliance: SEC Rules 17a-4 and 17a-3 Explained

In brief:

  • Securities and Exchange Commission (SEC) books and records Rules 17a-3 and 17a-4 set forth requirements in relation to regulated firms’ bookkeeping and recordkeeping practices
  • The SEC has a zero-tolerance approach to firms that breach books and records rules, illustrated by severe sanctions
  • It can be useful to think of SEC Rules 17a-3 and 17a-4 as a more extensive version of the Financial Regulatory Authority (FINRA) Rule 4511

Robust recordkeeping is one of the cornerstones of the securities industry, and the stakes are high.

While regulations like SEC Rules 17a-3 and 17a-4 may seem overwhelming, understanding their core principles is fundamental for any compliance professional working with broker-dealers.

Help your organization understand key principles and how to stay compliant with SEC books and records Rules 17a-3 and 17a-4 this handy summary.

What are SEC books and records Rules 17a-3 and 17a-4?

SEC books and records Rules 17a-3 and 17a-4 set forth obligations for broker-dealers regarding recordkeeping and the preservation of records.

These rules specify some of the many requirements that regulated financial organizations must meet when it comes to creating and retaining records related to their business operations, covering:

  • Accessibility
  • Completeness
  • Format
  • Retention and date-stamping
  • Indexing
  • Storage

Together with FINRA Rule 4511, these rules aim to promote transparency, accountability, and investor protection within the securities industry by establishing robust recordkeeping practices.

What are the key principles of SEC Rules 17a-3 and 17a-4?

Incidents of off-channel and unauthorized communications have hit the headlines countless times over the last few years, with increasing numbers of broker-dealers facing inquiry for mismanaging the way they store data.

Let’s take a look at the key principles of each rule.

SEC Rule 17a-3 books and records: Keeping it current and complete

This rule requires broker-dealers to create and maintain specific records related to their business operations, including:

  • Customer information, order records, and transaction details
  • Correspondence
  • Financial records like balance sheets and daily blotters
  • Regulatory reports that accurately reflect the firm’s financial condition and facilitate regulatory oversight

Importantly, updates must be real-time, whether they’re created and maintained using an electronic records system (ERS) or paper-based.

Rule 17a-4: Embracing technology

Rule 17a-4 relates to the storage and preservation of books and records, stating the duration and format for retaining records as well as procedures for accessing and reproducing them on request.

Compliance professional should keep these points in mind:

  • Ensure eDiscovery of records is instant and that records are downloadable
  • For audit trails, implement mechanisms to track updates to records and verify data integrity
  • ERS do the heavy-lifting by preserving records in a manner that protects them from alteration, deterioration, or loss

Broker-dealers are subject to SEC books and records Rules 17a-3 and 17a-4

In its supervisory role governing the securities market, the SEC enforces a comprehensive set of rules and regulations on the securities market, including Rules 17a-3 and 17a-4.

SEC regulated companies include investment firms, broker-dealers, investment advisors, and securities exchanges. Consequently, SEC Rules 17a-3 and 17a-4 apply to broker-dealers registered with the SEC in the U.S.

Broker-dealers must comply with these rules to ensure transparency, accountability, and investor protection within the securities industry. Failure to do so results in strict sanctions from regulatory bodies.

Amendments to SEC books and records Rules 17a-3 and 17a-4

Charting back to 1997, when a fax machine was more common than a Wi-Fi connection, Rule 17a-4 left many organizations struggling to interpret the rules in today’s digital solutions-based landscape.

However, SEC Rules 17a-3 and 17a-4 have been updated over the years to reflect communication evolutions, including social media, text messaging, and other messaging apps.

Recently, the SEC made amendments to recordkeeping Rule 17a-4 for the first time in 25 years. The SEC amended Rule 17a-4 on October 12, 2022, denoting a more modern and technologically-neutral approach to this rule.

So, what’s changed?

Below are the main areas in which SEC Rule 17a-4 was amended:

  1. Elimination of notice and representation requirements from Rule 17a-4(f)
  2. Technical requirements for ERS
  3. Requirements for broker-dealers using ERS
  4. Requirements for certain third parties that maintain broker-dealer regulatory records
  5. Requirement to produce electronic records in a reasonably usable electronic format
  6. Designation of broker-dealer examining authorities

Conveniently, FINRA has created a chart that summarizes the most significant changes. The effective date and compliance date for the amendments is January 3, 2023, and May 3, 2023, respectively.

Many broker-dealers commend the amended rule for its pragmatic approach to recordkeeping, aligning requirements more closely with industry standards and practices.

The revised framework reflects a nuanced understanding of operational realities by modifying the requirements in relation to third-part recordkeeping services. Overall, these modifications will foster greater efficiency and effectiveness in compliance efforts within the securities industry.

Zero-tolerance for recordkeeping failings

Current and complete books and records are one of the securities industry’s fundamental pillars, with the underlying purpose of protecting investors.

Taking an absolute approach to recordkeeping is important for avoiding confusion and resolving disputes, and ensures complete data is available for auditing purposes.

Breaching SEC books and records Rules 17a-3 and 17a-4 is serious, putting firms at risk of fines upwards of $150,000, potential bans, and suspensions for individuals.

Yet today’s communications trends can make it easy for individuals to fall foul of these directives.

In August 2023, the SEC charged 11 Wall Street firms for recordkeeping failures when individuals were found to have used messaging apps like WhatsApp, iMessage, and Signal on personal devices. In the course of this off-channel communication, firms failed to maintain or preserve necessary communications records, resulting in fines totalling $289 million.

The SEC’s zero tolerance of off-channel communication has given renewed impetus to organizations to ensure their internal compliance policies and procedures are up to scratch, and that, on an operational level, are being adhered to.

Summary

Amidst tighter regulations around communications compliance, it’s vital that financial organizations understand what is and isn’t permitted when it comes to communications, including bookkeeping and recordkeeping.

By understanding and adhering to the key principles of Rules 17a-3 and 17a-4, you can navigate the ever-changing compliance landscape with confidence.

Clear, accurate, and readily accessible records are not just regulatory requirements, but also the foundation for building trust and maintaining a healthy business.

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Published 20 February 2024

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