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Broker-dealers, including principal underwriters of insurance
products, may retain required records in electronic format, subject
to satisfaction of longstanding conditions. One such condition is
that the records must be preserved "exclusively in a
non-rewritable, non-erasable format." This condition is often
referred to as "write once, read many" or
"WORM."
The WORM requirement was designed to ensure that electronic
records are capable of being accurately reproduced for later
reference, thus addressing, among other things, SEC enforcement
concerns with unscrupulous broker-dealers who improperly alter or
destroy records — such as order tickets and other
transactional records — to conceal fraudulent activities.
In late 2016, FINRA announced that it fined 12 firms —
including some prominent industry names — a total of $14.4
million for not maintaining electronic records in WORM format. In
addition to finding that the 12 firms had WORM deficiencies that
affected "millions of records," FINRA found that each of
the firms had procedural and supervisory deficiencies affecting the
firm's ability to adequately retain and preserve electronic
records. In settling the actions, the firms neither admitted nor
denied the charges, but consented to FINRA's findings.
In its 2017 regulatory and examination priorities letter, FINRA
also announced that it will continue to assess firms' programs
to mitigate risks related to cybersecurity and electronic
recordkeeping, including compliance with WORM requirements by
vendor-provided email review and retention services.
The recent fines levied by FINRA suggest more than isolated
instances of non-compliance within the broker-dealer community, and
other firms would be well advised to review their own WORM
compliance, if they have not done so recently.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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