Blockchains and SEC 17a-4 Compliance

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17a-4, llc, is developing subledger technology to provide D3P services to blockchain network users. Subledgers might be the answer to SEC 17a-4 compliance for blockchain systems.

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...to prove that the institution’s instance hasn’t been changed in some way apart from the blockchain, an independent entity will maintain a subledger...

17a-4, llc, a leader in SEC Rule 17a-4 services, has begun to test blockchain subledgers as a means to provide Rule 17a-4(f) or the Designated 3rd Party compliance. As the financial industry begins to embrace blockchain technologies, the open issue remains SEC and FINRA compliance.

Though the infrastructure of blockchains addresses the integrity of transactions and prevents destruction of compliance records, the SEC, FINRA and other regulators have not provided guidance whether blockchains meet the non-erasable or write-once, read-many requirements of SEC Rule 17a-4(f).

Financial Transactions and subledger technology - The financial industry is implementing blockchain technologies for many different types of transactions including trades, swaps, forex, digital coin and other types of ownership transfer. Blockchain technology represents an effective platform for fraud reduction, fiscal accuracy and data transparency. In most implementations, each institution will maintain its own instance of the blockchain and could produce compliance records from that instance. However, to prove that the institution’s instance hasn’t been changed in some way apart from the blockchain, an independent entity will maintain a subledger and will be able to provide either to a regulator or to a law firm a confirmation as to the actual record and the integrity of that record.

17a-4’s proposed subledger Designated 3rd Party Services - Though the subledger technology is still in development at 17a-4, the proposed D3P services will work as follows:

  • 17a-4 will maintain subledgers as part of a regulated blockchain;
  • Subledgers will not generate any records but will receive a copy of all transactions occurring on the regulated blockchain;
  • 17a-4 will prepare Letters of Undertaking (SEC Rule 17a-4(f)(3)(vii));
  • 17a-4 will provide an annual review of the technology and infrastructure to compliance and legal.

“Though blockchain is still developing,” offers Douglas Weeden, Director of Compliance Services at 17a-4, llc, “we expect regulators will take a conservative approach and require that existing regulations regarding non-erasable copies of compliance records will be maintained for the foreseeable future.”

About 17a-4 llc:
17a-4 is a compliance services and software company with a focus on e-messaging and software solutions to meet regulatory and e-Discovery needs of institutional clients. Clients that are required to adhere to SEC, FINRA and CFTC regulations leverage 17a-4’s expertise to ensure their information infrastructure is in compliance. 17a-4’s architecture provides for a single-point in which all e-messaging content may be managed for retention, legal and regulatory holds and e-Discovery productions.

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