If you a thinking about starting a broker dealer make sure you consider the email retention requirement early in the process to ensure time to set up archiving as required by SEC Rules. A common finding of examinations and inspections relates to the failure to maintain electronic communications. And when starting a broker dealer this is probably one of the last things that is considered by many, given the complexities of the FINRA NMA application process.
FINRA broker-dealers are subject to SEC Rules (along with numerous other requirements). One of those requirements that frequently gets overlooked is the requirement to archive electronic communications. FINRA has historically been fairly aggressive with its enforcement fines when there are failures in the area of electronic communications retention. Clearly, one reason for this is that FINRA has published plenty of guidance on the topic, which frankly is not new. FINRA Rule 4511(a) basically requires FINRA members to preserve books and records as required under its rules as well as the rules and requirements of the Securities Exchange Act of 1934. And specifically, Rule 4511(c) requires that the records maintained shall comply with SEA Rule 17a-4.
The rule pertaining the preservation of electronic communications is SEA Rule 17a-4(f). Prospective broker-dealers should understand that every communication that relates to its “business as such” must be maintained pursuant to SEA Rule 17a-4(b) for a period for not less than three years, the first two of which in a readily accessible place. And yes, this applies to social media communications. SEA Rule 17a-4(b)(4) specifically requires broker-dealers to maintain, “originals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such, including all communications which are subject to rules of a self-regulatory organization of which the member, broker or dealer is a member regarding communications with the public.” And the storage requirements for electronic recordkeeping get fairly complex, particularly in terms of complying with the indexing and archiving requirements of Rule 17a-4(f).
One only need to look back at historical FINRA enforcement fines to know that they are quite serious about compliance with this rule. It is not unusual for non-compliance to yield fines of $10,000 to $50,000. And the head of FINRA Enforcement has publicly stated that he believes the cost of non-compliance should exceed the cost of compliance – and that is part of FINRA’s enforcement policy.
Email Retention – FINRA Provides an Answer For Those Starting a Broker Dealer
So what does it take to comply? Frankly, a good service provider. And FINRA has negotiated a special price for small firms (less than 150 employees). Global Relay offers a full service package to FINRA firms at the discounted price of $6 per user per month (with a minimum charge of $30). This is an amazing deal, and will facilitate compliance with not only the recordkeeping requirements of the rule, but also with the supervisory requirements related to electronic communications. There are other service providers out there, but none that are part of the FINRA Compliance Resource Provider program. For more information, visit FINRA’s Compliance Resource Providers site here. (Full disclosure – FirstMark is not affiliated with Global Relay and receives no compensation of any kind for referrals to them.)
If you have questions about becoming a FINRA member, or about electronic communications compliance, seek the services of a FINRA NMA expert. Mitch Atkins, FINRA’s former South Region Director, has extensive experience with FINRA new member applications, having previously overseen the membership application function at the regional level. Contact Mitch Atkins, Principal of FirstMark Regulatory Solutions at 561-948-6511.