A guide to how FINRA 4511 works

Background on FINRA

In its role of ensuring that the broker-dealer industry operates with integrity and fairness at all times, FINRA sets out rules and guidelines for member firms. In addition to this core aim, FINRA also makes sustained efforts to improve stability across member firm operations by promoting operational resilience.

Under the rules of FINRA and the SEC, broker-dealers, securities firms, funding portals, and financial institutions involved in capital acquisitions must comply with expansive recordkeeping requirements for capturing and retaining electronic communications.

Examining FINRA Rule 4511 guidance reveals that the term ‘records’ includes books, accounts, records, memoranda, and correspondence. This includes emails, instant messages, social media posts, and hard copy records.

What are the key principles for FINRA Rule 4511

The key principles of FINRA Rule 4511 state that member firms must:

• Create and maintain legible, true, accurate, and complete records
• Preserve records in the required format or medium
• Retain records for the specified length of time
• Conduct recordkeeping in line with all FINRA and SEC books and records requirements

FINRA Rule 4511 and electronic communications

FINRA Rule 4511 recordkeeping requirements extend to all business communications, sent or received internally or externally. Emails, instant messages, and social media posts are all subject to the requirements of FINRA Rule 4511.

Significantly, member firms must meet the books and records requirements irrespective of whether electronic communications are sent or received using the member’s platform or system, or a third-party's.

Originals of all electronic communications should be retained for at least three years. Member firms must also ensure the privacy of their electronic business communications by following data safeguarding protocols. FINRA’s guidance and reports are an invaluable resource for organizations seeking clarity.

Using electronic recordkeeping systems to comply with FINRA Rule 4511

FINRA Rule 4511 addresses the growing area of electronic recordkeeping systems (ERS), pertaining that these can be used providing that records can be readily available and downloaded.

FINRA outlines the digital standards that ERS must meet to be compliant, covering key aspects including data format, verification of the completeness and accuracy of data capture, and backup measures.

Is outsourced recordkeeping compliant with FINRA Rule 4511?

Under FINRA Rule 4511, member firms can use outsourced recordkeeping tools or platforms. In doing so, these members must know that they have an ongoing responsibility to oversee, supervise, and monitor the performance of outsourced recordkeeping to ensure it upholds the required standards.

One of the most pressing considerations when using third-party recordkeeping services is protection against cyber attacks. For this reason, member firms must implement robust information security policies and protocols. Given the pervasive nature of cyber criminals in the financial sector, FINRA Regulatory Notice 21-29 is a useful resource for remaining compliant with FINRA Rule 4511 when using third-party recordkeeping services.   

Consequences of violating FINRA Rule 4511: Fines and violations

FINRA Rule 4511 violation carries significant consequences, including fines and censures. Sanctions are designed to deter misconduct, thereby protecting the public and the integrity of the broker-dealer industry. 

Published sanctions guidelines state that FINRA Rule 4511 penalties and fines following non-compliance vary widely from $5,000 to $310,000. Severe violations of FINRA Rule 4511 and Exchange Act Rules 17a-3 and 17a-4 can result in suspension or even expulsion.  

In December 2021, the case of J.P. Morgan Securities LLC demonstrated that rules are worth nothing if they’re not adhered to. The firm’s widespread and long standing use of unrecorded eCommunication including text messages, personal email, and WhatsApp messages made waves in the securities industry. 

In a blog post published on the recordkeeping failures of JPMorgan Securities and the substantial fines ordered as a result, Global Relay’s Director of Regulatory Intelligence Alex Viall said that the events leave; 

“No doubt about where regulators stand on use of new forms of digital channel and communication in an area where many had conveniently been in denial. What was previously a gray area is now black and white.” 

Summary 

SEC books and recordkeeping rules demand compliance prioritization from member firms. Managing, securing, and archiving true and accurate records is core to reputational risk management in the securities industry. Vitally, staying on the right side of compliance is essential for long-term success.

Organizations must keep sight of retention timelines and implement best-practice policies around recordkeeping. By masterfully balancing access, transparency, and security protocols, firms can best position themselves to demonstrate compliance and effective auditing capability.  

Rather than narrowly ticking compliance boxes, truly internalizing diligent information governance proactively steers an organization’s culture towards fiduciary care. 

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