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FINRA imposed a total of $14.4 million in sanctions against 12 financial services firms for failing to preserve broker-dealer and customer records in a non-erasable and non-rewritable "write once, read many" format ("WORM"). WORM is intended to prevent the alteration of electronically stored records. FINRA emphasized that using WORM is "an essential part of the investor protection function" because these records are key to monitoring compliance with securities laws, particularly concerning antifraud provisions and financial responsibility standards.
FINRA found that the 12 firms "failed to retain in WORM format a vast number of electronic records," in violation of SEA Rule 17a-4 and FINRA Rule 4511. In addition, FINRA found other procedural and supervisory deficiencies at the firms, and determined that three of the firms did not retain certain required records.
Commentary / Nihal Patel
As noted by Steven Lofchie and Mark Highman in Lofchie's Guide to Broker-Dealer Regulation, violations of books and records rules are "frequent topics of disciplinary actions" and can be seen as "easy kills" for examiners. The authors acknowledge that the rules serve an important function, and failures to comply with them can "undermine[] the ability of the regulators to determine whether a firm is in compliance with the securities laws."
For the most part, the broker-dealers sanctioned by FINRA did not fail to keep records entirely; rather, they failed to keep them correctly. In certain of the cases, FINRA faulted firms for not having systems in place to ensure appropriate recordkeeping (e.g., one firm failed to obtain attestations from third-party vendors that they would supply records to regulatory authorities if the firm could not).
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