Quick Answer
A firm may preserve records electronically two ways: a non-rewriteable, non-erasable (WORM) format, or a time-stamped audit-trail alternative that can recreate an original record after a change. Only the WORM operator must also maintain a separate audit system. An undertaking signed by either a designated executive officer or a designated third party must stay on file with the firm's regulator.
An electronic recordkeeping system preserves records in a digital format that can be viewed and downloaded, and a firm may use one in place of paper if it meets one of two acceptable preservation methods.
How Can a Firm Preserve Records Electronically?
| Method | What it requires | Extra requirement |
|---|---|---|
| Non-rewriteable, non-erasable (WORM) format | The records cannot be altered or deleted once written. | A separate audit system providing accountability for who input records and who made changes, preserved for as long as the underlying record must be kept. |
| Audit-trail alternative | A complete, time-stamped audit trail capturing the creation, modification, and deletion of a record, the date and time of each action, and (if applicable) who took it, sufficient to recreate the original record if it is later changed or removed. | None. Tracking who did what is already built into the audit trail. |
Two more duties fall on the system itself, whichever branch the firm picks:
- The system must verify automatically the completeness and accuracy of its own storing and retention processes.
- The system must at all times be able to download and transfer a record and its audit trail in both a human-readable format and a reasonably usable electronic format, along with the information needed to locate the record. That capability is always on. Do not confuse it with the undertaking's download promise below, which only bites when the firm fails.
An electronic system is not the only alternative to paper. The records-preservation rule also allows micrographic media, meaning microfilm or microfiche, under its own separate set of requirements.
Exam Tip: Gotchas
- The audit-trail alternative is not satisfied by an ordinary activity log. It has to be able to recreate the original record after a modification or deletion, plus track who made each change.
- Only the WORM method carries the extra standalone audit-system requirement. Do not apply that extra burden to a firm using the audit-trail alternative instead.
Who Can Sign the Undertaking to Furnish Records?
- An undertaking must be on file at all times with the firm's designated examining authority. It carries three promises. The rule numbers none of them, so learn each one by what it does.
- The furnish promise: to furnish promptly whatever information regulators reasonably request. It names no format.
- The download promise: if the firm itself fails to download a requested record or its audit trail, the signer will download it in both human-readable and reasonably usable electronic format. It turns on the firm's failure alone, with no notice precondition.
- The access promise, which the rule opens with "Furthermore": reasonable steps to provide access to the preserved information. It needs both the firm's failure and reasonable notice to the firm, and it asks for one format, not both.
- The rule lets either of two people sign it:
- A designated executive officer: a member of senior management with access to the electronic recordkeeping system, directly or through a designated specialist.
- A designated third party: a person not affiliated with the firm who has access to the system and the ability to provide its records.
- One signature satisfies the requirement. The firm does not need both.
- The designated executive officer may appoint up to two designated officers and up to three designated specialists as backups, but appointing a backup does not relieve the designated executive officer of the underlying obligation.
- The system must include a backup or other redundancy capability so records stay accessible if the primary system becomes temporarily or permanently unavailable.
Think of it this way: the firm only needs one name on the undertaking, either an insider with system access or an outside party who has that same access. Backups exist so the obligation can still be met if that one signer is unavailable, not to spread the underlying duty across more people.
Where Must Certain Office Records Be Kept?
- The most recent two years of certain office-related records, including the records a firm must keep current for each office, such as blotters, order memoranda, and customer account records, plus communications and compliance and supervisory manuals, must be maintained at the office to which they relate.
- The firm has a broader alternative to keeping the records at each office. Rather than maintain them there, it may undertake to produce them promptly when a securities regulator's representative asks, either at the office the records relate to or at another location that representative agrees to.
- A narrow exception applies to a private residence used by a single associated person, or by several associated persons who share that residence and belong to the same immediate family, if the residence is not held out to the public as an office and no customer funds or securities are handled there. Those records may instead be kept at another location in the same state.
Exam Tip: Gotchas
- The office-location rule covers only the most recent two years of specific record types tied to that office. It does not reach the entire retention period, and it does not reach every record category.
What Should You Check on Exam Day?
- Match the preservation method to its extra requirement: only the WORM format needs a separate audit system.
- Confirm the undertaking needs exactly one signature, from a designated executive officer or a designated third party, not both.
- Remember a designated officer or specialist backup never removes the designated executive officer's own obligation.
- Apply the office-location rule only to the most recent two years of the specific record types it names.