The SEC Division of Trading and Markets clarified the applicability to broker-dealers and third-party service providers of certain Exchange Act recordkeeping requirements. The clarification was provided in response to a letter from FINRA expressing concern about agreements between broker-dealers and third-party recordkeeping service providers that contain provisions allowing the service providers to delete records that may be required to be preserved pursuant to Exchange Act Rules 17a-3 and 17a-4. Such provisions can be triggered by non-payment of fees by the broker-dealer.
The Division explained that records must be available for examination by the SEC, regardless of whether they are maintained by third-party service providers. Thus, provisions permitting a service provider to dispose of records in response to non-payment by a broker-dealer would be inconsistent with SEC rules. In the event that a third-party service provider deletes or discards such records in violation of retention requirements, the Division clarified that (i) the broker-dealer could be held accountable for a primary violation of record retention requirements and (ii) the service provider could be subject to secondary liability for aiding and abetting the violation.
Commentary / Steven Lofchie
There goes the plan to have those inconvenient records destroyed by not paying those annoying monthly fees. It was like killing two birds with one stone.
More seriously, both parties will need to go back and review their contract in light of the fact that many records have very, very long retention obligations associated with them; e.g., records dealing with AML or with long-term customer contracts.
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