In the wealth management and financial advisory space, nearly everything you do is subject to regulation. Marketing/advertising must be pre-approved, emails are stored, text messages are captured and more. When it comes to a firm’s recordkeeping processes and efforts, very little is not scrutinised.
While recordkeeping may sound simple, compliance encompasses much more than just the records themselves – what you store, how you store it, where you store and how long you keep it, all aspects have guidelines that must be followed.
Whether you are a financial adviser, back-office professional or serve other roles within the industry, understanding these important regulations and requirements is crucial to staying within compliance.
Want (or need) to learn more? Here is a simple guide to the basics of books and records and how it applies to wealth management firms.
What are the SEC’s books and record rules?
Officially known as Rules 17a-3 and 17a-4 under the Securities Exchange Act of 1934, the books and records rule defines what records broker-dealers must retain and how long those records and other important business documents must remain on file.
Because books and records cover such a wide variety of documents, ranging from employment applications, client recommendations to cancelled checks and email correspondence, it is considered one of the most fundamental compliance rules.
The main goal is to set a universal standard and create consistency among wealth management providers. This uniformity assists the SEC, FINRA and even state securities regulators in ensuring all firms are in compliance.
What types of firms do books and records requirements apply to?
All registered broker-dealers must follow the SEC’s books and records rule. The SEC defines a broker as “any person engaged in the business of effecting transactions in securities for the account of others.” Essentially, if you are buying or trading securities, you must register with the SEC and follow the recordkeeping rules.
Failure to comply with books and records can lead to severe fines, both for the firm and the individual broker, as well as other punishments. Notably, JP Morgan was fined US$125 million by the SEC and US$75 million by the Commodity Futures Trading Commission (CFTC) in 2021 for failure to comply with recordkeeping rules.
The SEC, FINRA and other state and local regulatory groups take record-keeping seriously. By following the SEC’s rules, firms and brokers will also be in compliance with other organisations.
What are the most important elements of books and records rules?
The complete books and records rule is lengthy, but here the key components of the rule fall into three categories:
- What activities must broker-dealers record? Broker-dealers must track the books, accounts, records, correspondence, and documents used to transact and run their businesses. These include asset and liability ledgers, securities records, trade confirmations, account ledgers, order tickets, employment applications, website and marketing material copy, and more. The records must be complete and accurate, meaning they cannot be duplicated or altered in any way.
- How long must records be kept? Retention requirements depend on the type of record, ranging from three years to 22 years. Most record types must be kept for three or six years. The books and records rule states that brokers must retain originals of all communication received and copies of all communication sent for at least three years. Bills, bank statements, business agreements, and other documents also fall into the three-year category. For the first two years, those records need to be easily accessible.
- What format should records be stored in? Firms may store their records in paper form, electronically or on micrographic media like microfilm. Electronic records have specific requirements detailed in SEA Rule 17a-4 (f), most notably that they must be stored in a system that meets specific requirements.
The Digital Organiser from Docupace
Docupace provides a secure, digital and compliant solution for wealth management firms to centralise all of their client records.
- Automatically organise and store all documents in a secure digital vault
- Comply with rules 17a-3 and 17a-4
- Leverage true cloud-based WORM storage
- Assign roles and permissions to manage who has access to which records
- Track user actions to identify suspicious activity
Click here to watch a quick overview of the Digital Organiser.
Of all the compliance issues firms and brokers face, books and records are perhaps the most important and the most scrutinised. Although it is helpful to understand the basics, reading the entire regulation can help ensure you and your firm stay in compliance.
