Ever since the SEC introduced regulations 17a-3 and 17a-4, broker-dealers (and all associated with the business) have had to comply with stringent record keeping requirements. However, firms aren’t out the woods yet as the upcoming ‘Regulation Best Interest’ is about to make this task even harder.
Regulations 17a-3 and 17a-4 have created a significant administrative burden for firms. Not only is the scope of these records extensive (including trade tickets, puts, calls, spreads, customer account profile info etc) but a lot of considerable boxes have to be ticked.
These records need to be stored for a minimum of six years, be time stamped with unique and sequential identification numbers, organized and indexed correctly and stored in a digital format that prohibits erasure. Oh, and duplicate copies need to be stored elsewhere.
With many firms struggling to comply with these rules, you can read an up to date summary of 17a-3 and 17-a-4 here, helping you to get a complete overview of what you need to do to stay compliant.
What's changed now?
As of now (June 2020) further change can be expected with 17a-3 and 17a-4. These developments have already been made public but you’d be forgiven for overlooking them as they are wrapped up in a much larger regulatory bundle.
Last year the SEC announced the introduction of Regulation Best Interest to enhance the quality and transparency of retail investor relationships with investor advisers and broker-dealers.
In a nutshell, Regulation Best Interest (or Reg BI) requires broker-dealers act in the best interest of retail customers. Even though many firms in the industry already do this, Reg BI:
- Requires ‘client relationship summaries’ to be submitted to the SEC.
- Provides guidance as to the fiduciary obligations to which an investment adviser is subject to with clients.
- Clarifies the ability of the broker-dealer to provide advice that is ‘solely incidental’ to its transaction execution services without being required to register as an investment adviser.
A lot of Reg BI is to do with requirements for disclosure of information for retail clients, thorough due diligence and the establishment of policies to avoid conflicts of interests.
But there's more
There is already plenty for compliance departments to get their teeth into. But the SEC have also included new record keeping requirements in Reg BI and from June 2020 (the implementation month of this regulation), new paragraphs will apply under 17-a3 and 17-a4.
Specifically, for each retail customer to whom a recommendation is provided, the broker-dealer must create a record of all information collected from and provided to the retail customer (pursuant to Reg BI) and the identity of each registered representative responsible for the account.
Like existing requirements under 17a-3 and 17a-4, these records must be retained for at least six years and in the same thorough and secure manner as already prescribed. Unsurprisingly, commentators have argued that this creates additional significant work. In response, the SEC has stressed this is simply to help demonstrate Reg BI is being complied with.
What is certain is these requirements need to be met and firms only have six months to get ready for them. Therefore, it’s essential to check the right information is being collected and stored securely and correctly.
The need to stay compliant
Falling foul of 17a-3 and 7a-4 is a serious matter, with fines upwards of $150,000 and potential bans and suspensions for individuals and companies alike. In 2017, FINRA fined BOK Financial Securities $175,000 for failures linked to these regulations and later that same year fined Raymond James & Associates $150m for failing to maintain reasonably designed supervisory systems and procedures for reviewing communications.
The following year, BGC Financial agreed to pay a $1.25m civil penalty over charges from the SEC it had failed to preserve proper records (the firm denied any wrongdoing via this settlement).
The message is clear – the broker/dealers will either have to invest in complying with 17a-3 and 17a-4 or spend the money on penalties instead.
Looking for more information? We’ve created a comprehensive cheatsheet on 17a-3 and 17a-4 to help you understand everything about these crucial rules and how to meet them.
