Understanding FINRA’s Cloud Storage Requirements

Why FINRA Regulates Cloud Storage

The Financial Industry Regulatory Authority (FINRA) is responsible for overseeing and regulating broker-dealers in the United States. One of FINRA’s core responsibilities is ensuring that broker-dealers properly store and maintain required records per securities laws and regulations. This includes setting standards for how firms can use cloud storage for their records.

FINRA Rule 4511 mandates that broker-dealers must preserve required records in a non-rewritable and non-erasable format. This applies to all types of records, whether stored on-premises or in the cloud. Firms must also keep records accessible and arranged in a way that allows regulators like FINRA to access them.

FINRA’s Stance on Cloud Storage

FINRA recognizes that many firms want to take advantage of cloud solutions for storage. In regulatory notices, FINRA has clarified that broker-dealers can use cloud storage for required records as long as they take steps to ensure compliance with recordkeeping rules.

Some key requirements from FINRA for cloud storage include:

– Firms must maintain full ownership and control of records stored in the cloud. Cloud providers cannot have any rights or interests over the records.

– Firms must have the ability to promptly download records from the cloud so they can provide them to regulators upon request.

– Cloud storage systems must prevent any possible data loss or gaps in regulatory records.

– Firms must authenticate any access to cloud storage systems. They must log and audit all access to records.

– Firms should encrypt sensitive customer records and data at rest in the cloud. Data in transit to/from the cloud should also be encrypted.

Selecting Compliant Cloud Providers

Broker-dealers are responsible for vetting and selecting compliant cloud vendors for record storage. When evaluating providers, key criteria include:

– Geographic location of cloud servers and data centers. Records must remain within the firm’s jurisdiction at all times.

– Ability to keep records in the original format with no alterations.

– Data redundancy and backup capabilities to prevent data loss.

– Authentication protocols and access logging/auditing features.

– Encryption methods for records in transit and at rest.

– Contractual assurances that the firm retains full ownership and control of records.

– Vendor’s commitment to regulatory compliance and auditing.

Firms should conduct thorough due diligence on potential cloud vendors. They may need to include special recordkeeping stipulations in their service contract before signing up for cloud services.

Maintaining Compliance With Cloud Storage

Broker-dealers must take reasonable steps to ensure their cloud storage usage stays compliant with FINRA regulations. This involves:

– Establishing and documenting policies, procedures and controls for cloud recordkeeping.

– Training staff on proper use of cloud storage systems.

– Regularly monitoring cloud vendor’s security and performance.

– Performing spot checks to ensure records remain intact and accessible.

– Conducting annual reviews of agreements/contracts with cloud provider.

– Updating contracts whenever regulatory recordkeeping requirements change.

– Notifying and obtaining approval from FINRA before using new cloud storage systems.

The Bottom Line

FINRA allows broker-dealers to leverage cloud technology for record storage provided they take precautions to remain compliant. Firms should thoroughly vet cloud providers, establish strong controls, and regularly review policies to satisfy FINRA recordkeeping rules. With the right due diligence, cloud storage can benefit firms while still upholding regulatory standards.

Key Factors for Ensuring Compliant Cloud Storage

While FINRA allows broker-dealers to use cloud storage for required records, firms must take care to implement solutions that align with regulations. Some key factors to consider include:

Data Access Controls

Stringent access controls are vital for securing records in the cloud. Firms should limit access to authorized personnel only and implement strong authentication methods like multifactor authentication. Role-based access and permission settings should be configured to prevent unauthorized actions like deletions or modifications.

Business Continuity Plans

A business continuity and disaster recovery (BCDR) plan is essential to avoid any data loss scenarios. The plan should cover procedures for smoothly restoring access and recovering data in the event of a cloud outage or failure. Firms should also maintain on-site backups of critical records.

Proper implementation

Mistakes in cloud storage implementation can create compliance gaps. Broker-dealers should follow best practices for configuration, testing, and roll-out of cloud systems. Setting up automatic alerts and monitoring helps quickly catch any issues.

Technology Stack

The underlying technology stack can impact regulatory compliance. Firms should choose cloud infrastructure involving immutable storage, versioning capabilities, and tamper-resistant logging. Enterprise-grade security protections are also preferred.

Visibility into Cloud Operations

Maintaining visibility into cloud environments is key for monitoring regulatory compliance. Broker-dealers should have access to security logs, user activity audit trails, and configuration data for awareness of their cloud operations.

Architecture Choices

The cloud deployment model and architecture options like single vs. multi-tenant environments have regulatory implications. Firms should architect cloud storage to best meet compliance needs based on factors like data sensitivity.

Cloud Contracts

The contract terms with a cloud provider significantly impact compliance. Key considerations include jurisdiction, data ownership rights, firm control/access to data, and provisions for regulatory audits. Firms should involve legal counsel when negotiating cloud contracts.

Testing and Monitoring

Consistent testing and monitoring is vital for compliant cloud storage. Broker-dealers should regularly test backup and restoration of records. They should also monitor user actions, security posture, and vulnerabilities via audits.

Incident Response Plans

Firms should develop incident response and breach notification procedures for their cloud environments. Prompt communication and coordination with regulators is essential in the event records are compromised.

Conclusion

With careful planning and diligent execution, broker-dealers can adopt compliant cloud solutions for efficiently storing required records. Regulatory compliance in the cloud requires a holistic approach combining people, processes, and technology. Firms that invest in understanding and applying FINRA’s cloud storage guidance can unlock the benefits of the cloud while still upholding their regulatory obligations.