Menu

Expect Focus Life Insurance, June 2018

SEC Warns About Third-Party Destruction of Broker-Dealer Records

Financial Services Regulatory   |   Insurance   |   Life Insurance & Financial Lines   |   Securities & Investment Companies   |   June 25, 2018
Download   
Share Page

The SEC staff issued an April 12 letter addressing broker-dealer contracts with third-party recordkeeping service providers under which the service provider can delete or discard records of a broker-dealer who fails to pay fees due under the recordkeeping agreement, among other scenarios.

The letter, issued in response to an inquiry from the FINRA, reviews relevant requirements under the Securities Exchange Act of 1934, as well as related rules and SEC statements. These include:

  • a requirement to file with the SEC a written undertaking by the third-party recordkeeper to make the broker-dealer records available to the SEC; and
  • a provision to the effect that an arrangement with a third-party recordkeeper does not relieve a broker-dealer of its record preparation and maintenance obligations under SEC rules.

Such provisions are intended "to assure accessibility of broker-dealer records in situations where, for example, a service bureau refuses to surrender the records due to nonpayment of fees," according to the letter.

"[C]ontractual provisions that would permit, among other things, a service provider to delete or discard records in the event of non-payment by the broker-dealer are inconsistent with" the retention and undertaking requirements prescribed by the SEC, the letter concludes. Moreover, the letter emphasizes that deletion or disposal of records in a manner inconsistent with such requirements would not only constitute a "primary violation" by the broker-dealer, but may also subject a third-party recordkeeper to "secondary liability."

Accordingly, to avoid such violations, both broker-dealers and third-party recordkeepers have an incentive to review their practices and contractual arrangements – including those related to variable insurance products. In light of the staff’s letter, it is likely FINRA and SEC exam personnel will be on the lookout for potentially problematic contractual provisions.

 

©2018 Carlton Fields Jorden Burt, P.A. Carlton Fields practices law in California through Carlton Fields Jorden Burt, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications

Disclaimer

The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.