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