Finra Compliance and Cloud Storage

Introduction

Financial services firms are required to comply with regulations set forth by the Financial Industry Regulatory Authority (FINRA). These regulations cover recordkeeping requirements, including how firms store electronic communications and records. As financial firms increasingly adopt cloud storage solutions, there are important considerations around remaining FINRA compliant.

FINRA Recordkeeping Rules

FINRA Rule 4511 requires member firms to make and preserve books and records as required under FINRA rules, the Securities Exchange Act of 1934, and applicable Exchange Act rules. Firms must preserve records in a format and media that complies with SEA Rule 17a-4.

SEA Rule 17a-4 specifies record retention requirements for electronic storage media. It requires that electronic storage media permit records to be easily accessible and convertible into legible paper copy. Firms must have appropriate systems and controls in place to safeguard records and data.

Using Cloud Storage

Cloud storage services offer financial firms benefits like lower costs, greater accessibility, and data protection through redundancy. However, firms must evaluate cloud providers carefully to maintain FINRA compliance.

Firms retain responsibility for recordkeeping even when using third-party cloud storage. They must ensure cloud storage systems meet the accessibility, format, and media requirements outlined in Rule 17a-4. Firms should conduct due diligence to confirm providers will meet SEC format and media requirements.

Cloud storage systems must allow records to be downloaded and accessed for review. Data must be retained in a non-rewriteable and non-erasable format like WORM (Write Once, Read Many). Firms should obtain assurances from providers that records will not be deleted or altered throughout the retention period.

Data Protection Requirements

FINRA rules prohibit unauthorized access to customer records and information. Cloud providers should provide safeguards like encryption to protect firm data. Firms must also have the ability to delete records after the required retention period.

Providers should offer reporting to demonstrate controls and safeguards. Firms can request third-party audits and SOC reports to validate security practices. Detailed service level agreements outlining access controls, encryption, and data handling procedures are essential.

Supervision of Cloud Storage

Firms must establish supervisory systems to ensure compliance when using cloud storage. They should document due diligence on providers’ capabilities, security practices, and internal controls. Policies and procedures for record retention, maintenance, and destruction should cover cloud-stored data.

Training ensures personnel understand requirements for cloud-based recordkeeping. Supervision provides oversight into proper usage of cloud storage systems. Firms can conduct audits to verify that records are accessible and convertible to paper when needed for regulatory review.

Conclusion

Cloud storage can provide financial firms scalability and cost savings for recordkeeping. However, firms must evaluate providers thoroughly and implement policies to remain compliant with FINRA regulations. Close supervision and training helps support proper record retention and maintenance in the cloud. With the right due diligence and controls, firms can leverage cloud benefits while satisfying regulatory requirements.

References

FINRA Rules 4511 and 4512
SEA Rule 17a-4

The Shared Responsibility Model

When using cloud storage providers, financial firms should understand the shared responsibility model. This model defines the responsibilities of the cloud provider versus those of the customer.

Cloud providers are typically responsible for the underlying infrastructure, networking, hardware, and facilities. The provider manages the physical servers, data centers, and core networking capabilities.

Customers are responsible for their data, accounts, services, applications, and end-user access. The financial firm manages user accounts, access controls, encryption, and application configurations.

By delineating responsibilities, the shared model helps firms maintain compliance by focusing security and regulatory efforts on their domains. Firms should ensure service agreements and controls address their responsibility areas.

Encryption and Key Management

Encryption of sensitive financial data is critical for regulatory compliance and data security. Firms should adopt encryption across infrastructure, particularly for data in transit and at rest.

Cloud providers may offer default encryption capabilities, but firms should not rely solely on these. They should implement application-level encryption under their control for maximum security.

Managing and protecting encryption keys is also the firm’s responsibility. Keys should be stored securely using hardware security modules or secure vault services. Access should be tightly restricted based on need.

Setting encryption requirements, managing keys, and controlling access protect sensitive data and help satisfy regulatory obligations.

Auditing Cloud Providers

While firms can review third-party attestations and reports, they may also want to conduct their own audits of cloud providers.

Audits help firms understand the provider’s controls and operating environments better. Firms can request evidence like system configurations, access logs, and incident reports to validate security practices.

In-person site visits to data centers allow firms to observe physical and environmental security measures. They can also interview operations personnel and watch processes firsthand.

Conducting their own audits gives firms greater visibility into providers’ security, availability, and regulatory compliance. It also demonstrates the firm’s due diligence.

Vendor Management Programs

Maintaining FINRA compliance in the cloud requires actively managing providers through a vendor management program. This systematic approach provides oversight into vendors’ activities.

Vendor management programs include assessments before engagement to validate capabilities and controls. They institute service agreements that outline responsibilities and requirements.

Providers are monitored continually post-engagement to review performance, identify issues, and initiate fixes. Firms can request evidence of ongoing compliance.

With vendor management programs, financial firms take an active role in supervising cloud providers. This helps them meet their regulatory obligations for outsourced services.

Summary

Financial firms can leverage cloud benefits by understanding the shared responsibility model, managing encryption rigorously, auditing providers, and institigating vendor management programs. With appropriate due diligence and controls, cloud services help firms achieve regulatory compliance and data protection.