On October 2022, the U.S. Securities and Exchange Commission (SEC) amended SEC Rule 17a4, which outlines the specific requirements for recordkeeping and preservation by broker-dealer firms. Compliance with this rule during your broker dealer audit is crucial for both legal standing and operational transparency. In addition, the SEC can charge broker-dealer firms with steep penalties for recordkeeping failures. In this article, we’ll  identify what broker-dealers need to understand about SEC Rule 17a4 requirements to maintain regulation compliance and maintain trust with clients and stakeholders.


What Is SEC Rule 17a4?

The Code of Federal Regulations (CFR) 17a4 indicates “records to be preserved by certain exchange members, brokers, and dealers.” It applies to a series of entities, including members of the national securities exchange, brokers, or dealers. 

Under the SEC, the amended rule states, “broker-dealers to maintain and preserve electronic records exclusively in a non-rewriteable, non-erasable format (also known as write once, read many (WORM) format).” SEC Rule 17a4 also mentions the preservation, accessibility, and retention periods for broker-dealers for 3-6 years. Due to the October 2022 SEC amendment and the WORM format, broker-dealers need to include an audit trail alternative.


Audit Trail and Write-Once-Read-Many (WORM) 

The audit trail and the WORM rule are two distinct concepts under SEC Rule 17a4.

  1. Audit Trail: Broker-dealers must keep comprehensive recordkeeping of all activities related to securities transactions. 
  2. WORM Rule: Mandates that broker-dealers preserve records in a non-rewritable, non-erasable format. So, once the record is stored, no alteration or deletion is allowed.

Let’s examine these concepts and how they may affect your future broker dealer audits


Audit trail 

The audit trail refers to the chronological and systematic documentation of securities transaction activities. It involves recordkeeping of the trade lifecycle so regulators, auditors, and compliance officers can reconstruct and verify the trade transactions. It should be time-stamped and based on the new amendment—it needs to include the following:

“(1) all modifications to and deletions of a record or any part thereof; 

(2) the date and time of actions that create, modify, or delete the record; 

(3) if applicable, the identity of the individual creating, modifying, or deleting the record; and 

(4) any other information needed to maintain an audit trail of the record in a way that maintains security, signatures, and data to ensure the authenticity and reliability of the record and will permit the re-creation of the original record if it is modified or deleted.”

When broker-dealers follow these requirements, they demonstrate transparency and compliance with the SEC rule. It also facilitates regulatory examinations and contributes to the integrity of the trade markets.


WORM compliance under SEC Rule 17a4

The “write once, read many” (WORM) format under SEC Rule 17a4 mandates the accuracy, authenticity, and accessibility of the preserved trade records used for audits and compliance officers. The WORM rule indicates that the record is to be in a non-rewriteable, non-erasable format, such as an electronic storage system with built-in WORM functionality. There is no set standard about the system broker-dealers should use except that it maintains the immutability and longevity of the trade records for the required retention period of 6 years.


Best Practice for Broker-Dealer Firms

Broker-dealer firms should establish best practices to ensure compliance, such as investing in secure and reliable electronic recordkeeping software with efficient storage for the required retention period and providing easy records retrieval. This will also assist with ensuring that adequate records are maintained for your annual broker dealer audit.

Assurance Dimensions is a registered PCAOB accounting firm. Our registration with the PCAOB enables us to perform broker dealer and PCAOB audits and holds us accountable to PCAOB auditing standards to ensure audits are performed to the best quality. Contact us today for more information on our audit and assurance services.