What Are SEC Document Retention Requirements?

The Securities and Exchange Commission (SEC) has document retention regulations that mandate the creation and preservation of business records by financial firms. The purpose of these rules is to promote transparency, protect investors, and uphold the integrity of the financial system. Maintaining a detailed history of business activities, transactions, and communications allows regulators to conduct effective examinations and investigations.

Applicability of SEC Retention Rules

The SEC’s books and records rules primarily apply to specific types of financial firms. The two main entities covered by these retention mandates are broker-dealers and investment advisers. A broker-dealer is a firm that buys and sells securities for its own account or on behalf of customers. These firms are central to the functioning of the securities markets.

An investment adviser is a firm compensated for providing advice about investing in securities, and they often manage investment portfolios. While other entities like public companies have record-keeping obligations, the rules for broker-dealers and investment advisers are highly specific. This is due to their direct handling of customer transactions and assets.

Key Documents for Broker-Dealers

SEC Rule 17a-3 outlines the record-keeping obligations for broker-dealers, requiring the creation of numerous records. A primary requirement is the maintenance of blotters, which are daily records of original entry. These must detail all purchases and sales of securities, receipts and deliveries of securities, and all cash receipts and disbursements, including the account, security name, amount, price, and trade date.

Firms must also maintain ledgers reflecting all assets, liabilities, income, and expenses, which form the basis of their financial statements. A separate securities ledger must show all long and short positions for the firm and its customers. This record must also detail the physical location of all securities held.

Broker-dealers must create a record for each customer that includes their name, address, and suitability information. Firms must also keep copies of all written agreements with customers, such as margin or options agreements. This ensures a clear understanding of the rights and responsibilities of both the firm and its clients.

Transaction records, or order tickets, are required for each brokerage order and must be created at the time of the transaction. These must show the order’s terms, the account, time of entry and execution, price, and the identity of the person who handled the order.

Broker-dealers must also retain several other types of records, including:

• Copies of all business-related communications, such as emails and instant messages.
• Records of all written customer complaints, detailing the complainant, date, and disposition.
• Trial balances prepared at least monthly.
• Computations of net capital prepared at least monthly to demonstrate financial solvency.

Key Documents for Investment Advisers

Investment advisers are subject to record-keeping rules under the Investment Advisers Act of 1940, detailed in Rule 204-2. This rule requires advisers to keep accurate and current records of their business. This allows regulators to monitor an adviser’s activities and verify compliance with its fiduciary duties.

Required financial records include journals detailing all cash receipts and disbursements, as well as ledgers for all asset, liability, capital, income, and expense accounts. A memorandum must be created for each security order, showing its terms, who recommended and placed it, the relevant account, and the executing broker-dealer.

Advisers must maintain all written agreements with clients, such as advisory contracts and any powers of attorney. They must also keep records of every transaction in a client’s account and a list of all securities held in client portfolios. For transactions subject to the T+1 settlement cycle, advisers must also maintain time-stamped records of each confirmation, allocation, and affirmation.

Advisers must also keep records related to communications and ethical compliance, including:

• A copy of all advertisements and notices sent to ten or more persons.
• Records related to their Code of Ethics, including violations and actions taken.
• Records of personal securities transactions by their employees.
• Records that support performance calculations and presentations to ensure advertising is verifiable.

Retention Periods and Storage Format

SEC rules specify how long records must be kept, with requirements detailed in Rule 17a-4 for broker-dealers and Rule 204-2 for investment advisers. Many records, like broker-dealer blotters and ledgers, must be preserved for at least six years. Other records, such as order tickets or advertising materials, have three or five-year retention periods.

For the first two years of any retention period, records must be kept in an easily accessible place. Certain corporate documents, such as articles of incorporation, must be maintained for the life of the firm.

The storage format for electronic records is also regulated. The traditional standard was the “Write Once, Read Many” (WORM) format, which prevents a record from being altered or erased. Recent amendments provide an alternative: an electronic recordkeeping system with an audit-trail feature. This system must preserve a time-stamped audit trail that tracks all modifications, allowing for the recreation of the original record.

Firms must be able to promptly produce records for regulators in a usable electronic format. If a firm uses a third-party service for record maintenance, that provider must often file an undertaking with the SEC. This filing agrees to give regulators access to the records, ensuring they can obtain necessary information.