Compliance Solutions for Investment Advisers

FAQs — Books & Records General

 

All Records

Where can an investment adviser find a list of the books and records that they are required to make and keep?

Rule 204-2 under the Advisers Act (commonly referred to as the “Books and Records Rule”) details the books and records that a registered investment adviser must make and maintain.

What are the basic types of records investment advisers are required to make and maintain?

Paragraph (a) of Rule 204-2 sets forth a list of eighteen types of records related to the advisory business of the adviser that an adviser must make and keep, including, but not limited to:

  • Financial records (such as ledgers, check books, invoices, bank statements, audited financial statements);
  • Order memoranda for the purchase or sale of securities (whether given or received by the adviser);
  • Written communications received and sent by the adviser (concerning investment recommendations, disbursement of funds, delivery of securities or the placing or execution of securities orders);
  • A list of discretionary accounts (together with copies of any powers of attorney granting discretion);
  • Written agreements with clients;
  • Copies of all marketing materials;
  • The adviser’s current and historical code of ethics (together with any violations and acknowledgements);
  • Access person reports (annual holdings and quarterly transactions);
  • A current and historical list of access persons;
  • Brochures and brochure supplements;
  • Solicitors’ written disclosure statements;
  • Records to support performance reporting;
  • Historical and present versions of compliance policies and procedures (together with any documentation of the adviser’s annual review of such policies and procedures); and
  • Records pertaining to political contributions.

Is an investment adviser that is deemed to have custody over client securities or funds required to keep and maintain any additional records?

Paragraph (b) of Rule 204-2 lists records which are applicable to advisers with custody over client securities or funds. If an investment adviser has custody or possession of securities or funds of any client, the records required to be made and kept include:

  • A journal or other record showing all purchases, sales, receipts and deliveries of securities (including certificate numbers) for such accounts and all other debits and credits to such accounts;
  • A separate ledger account for each such client showing all purchases, sales, receipts and deliveries of securities, the date and price of each purchase and sale, and all debits and credits;
  • Copies of confirmations of all transactions effected by or for the account of any such client; and
  • A record for each security in which any such client has a position, which record shall show the name of each such client having any interest in such security, the amount or interest of each such client, and the location of each such security.

Are there any additional records an investment adviser must keep if the adviser is deemed to have custody solely because a related person holds client assets?

If a related person holds client assets and an adviser wants to assert that they are operationally independent of that related person, the adviser must keep a copy of the memorandum describing the basis upon which the adviser has determined that the presumption that the related person is not operationally independent has been overcome.

What types of information must an investment adviser keep and maintain with regard to client portfolios?

The first section of Paragraph (c) of Rule 204-2 lists the client portfolio records an adviser must maintain for each client to whom the adviser renders any investment supervisory or management service. These records include:

  • Records showing separately for each such client the securities purchased and sold, and the date, amount and price of each such purchase and sale; and
  • For each security in which any such client has a current position, information from which the investment adviser can promptly furnish the name of each such client, and the current amount or interest of such client.

What records must an investment adviser make and keep if they vote proxies on behalf of their clients?

The second section of Paragraph (c) of Rule 204-2 lists the records an adviser that exercises voting authority with respect to client securities must make and retain. These records include:

  • Copies of all proxy voting policies and procedures;
  • A copy of each proxy statement that the adviser receives regarding client securities;
  • A record of each vote cast by the investment adviser on behalf of a client;
  • A copy of any document created by the adviser that was material to making a decision how to vote proxies on behalf of a client or that memorializes the basis for that decision; and
  • A copy of each written client request for information on how the adviser voted proxies on behalf of the client, and a copy of any written response by the investment adviser to any (written or oral) client request for information on how the adviser voted proxies on behalf of the requesting client.

How long is an investment adviser required to keep required books and records?

Generally, books and records are required to be maintained and preserved in an easily accessible place for a period of not less than five years, the first two years in an appropriate office of the investment adviser.

Are state-registered investment advisers subject to the same recordkeeping rules?

Most states have regulations very similar, if not identical, to Rule 204-2 under the Advisers Act. In fact, some states have incorporated Rule 204-2 directly into their investment adviser regulations. State-registered investment adviser should always check the regulations of the specific state or states in which they are registered.

What are some common recordkeeping deficiencies found during regulatory examinations?

Common deficiencies include:

  • Inability to respond to SEC document requests in a timely manner;
  • Failure to maintain client suitability information;
  • Failure to maintain correspondence with clients;
  • Failure to maintain cash receipts and disbursement journals;
  • Financial statements not current;
  • Inadequate documentation of supervision;
  • Failure to maintain books and records in a standardized format;
  • Inability to access electronic records;
  • Not properly safeguarding client and firm records;
  • Failure to maintain all business-related electronic communications;
  • Failure to maintain books and records for the first two years at the adviser’s principal place of business;
  • Incomplete order memoranda or order tickets;
  • Incomplete or missing acknowledgements of the adviser’s code of ethics;
  • Incomplete or missing acknowledgements of compliance policies and procedures manual;
  • Incomplete personal securities transaction reports;
  • Inability to substantiate advertised performance figures; and
  • Failure to maintain lists of the delivery date and recipients of the advisory firm’s disclosure brochure.

Does an investment adviser need to keep copies of trade confirmations if they are stored electronically by the client’s broker-dealer?

An adviser must retain trade confirmations for three reasons:

  1. The repository at the broker-dealer is for the broker-dealer’s books and records and not the adviser’s.  Therefore, the adviser is technically not meeting the requirement of Rule 204-2 if they rely on broker-dealer’s books and records as a proxy for their own.
  2. Aside from (1) above, some broker-dealers only keep records for certain periods and even those may have varying degrees of accessibility (e.g., online copies available for 6 months and then hard-copy only back X years was a standard policy not too long ago).  This is further exacerbated by the fact that the broker-dealer can change their retention policies (within the restrictions of broker-dealer books and records requirements) without notice to the adviser.
  3. Aside from (1) and (2) above, if for whatever reason the broker-dealer’s repository is not available at the time of inspection, the adviser will not likely get a pass from the regulator by saying “well I rely on the broker-dealer for my books and records, and their system is down.”

 

Electronic Records

Are investment advisers allowed to keep records in an electronic format?

Advisers are permitted to keep their records in an electronic format.

What are the requirements for keeping records electronically?

An adviser is permitted to maintain records electronically if it establishes and maintains procedures: (i) to safeguard the records from loss, alteration, or destruction, (ii) to limit access to the records to authorized personnel, the SEC, and (in the case of funds) fund directors, and (iii) to ensure that electronic copies of non-electronic originals are complete, true, and legible.

Are investment advisers required to keep electronic records in a non-rewriteable, non-erasable format?

No.  Advisers do not have to keep records in a non-rewriteable, non-erasable (also known “write once, read many,” or “WORM”) format.

How should investment advisers store electronic records?

Investment Advisers may keep records on various electronic storage media, subject to certain conditions.  Advisers must:

  1. Arrange and index the records in a way that permits easy location, access, and retrieval of any particular record;
  2. Provide promptly any of the following:
    • Legible, true, and complete copy of the record in the medium and format in which it is stored;
    • A legible, true and complete printout of the record; and
    • Means to access, view, and print the records; and
  3. Separately store, for the time required for preservation of the original record, a duplicate copy of the record;
  4. Maintain and preserve the records, so as to reasonably safeguard them from loss, alteration, or destruction;
  5. Limit access to the records to properly authorized personnel; and
  6. Reasonably ensure that any reproduction of a non-electronic original record on electronic storage media is complete, true, and legible when retrieved.

What are the requirement for providing electronically formatted books and records during an SEC examination?

Advisers must be able to promptly provide (i) legible, true, and complete copies of records in the medium and format in which they are stored, and printouts of such records; and (ii) means to access, view, and print the records.

What does “promptly” mean in this case?

There is no statutory definition of “promptly,” but in the past, it has meant not more than 24 hours. As technology has improved, however, the SEC has been known to shorten this time frame considerably.

Are investment advisers required to retain email?

If the email would constitute a required record if it was in writing, then yes.

May an adviser delete non-required email?

Currently, it is acceptable to delete non-required email, but advisers should be very cautious when doing so.  Internal procedures must be very specific as to what email may or may not be deleted and controls must be in place to monitor compliance with these procedures.

Does an investment adviser need to adopt a formal email retention policy?

Because SEC officials have consistently noted that one of the main compliance concerns with respect to investment advisers is their failure to maintain and produce required books and records, including email, it would be prudent for an advisory firm to adopt a formal email retention policy.

What type of email retention policy should an adviser adopt?

An investment adviser may take either of two approaches in formulating an email retention policy:

  1. Create a policy requiring the retention of all email; or
  2. Create a policy requiring the retention of email falling within Rule 204-2, but permitting the destruction of all other email. Such a policy should provide for some method or system of surveying deleted email to ensure the retention of email covered under Rule 204-2.

What should an investment adviser’s formal email retention/destruction policy address?

A formal email retention/destruction policy should be comprised of several factors, including, (i) the designation of an individual responsible for supervision of the policy; (ii) a requirement that advisory firm personnel refrain from conducting business through any communication, network not maintained by the advisory firm (e.g., email, instant messaging, text messaging); (iii) a requirement that electronic communications that fall within the applicable recordkeeping requirements are identified and preserved in the appropriate manner; (iv) a description of the system or method used that will be used to identify email that fall within applicable recordkeeping requirements; (v) a requirement that disposal of email is carried out in a  way that protects confidentiality; (vi) education and training programs; and (vii) an annual review of the policy.

How long must email be kept?

Email must be kept for the same length of time as if the record was a written/printed record.

 

Important Information

The information contained in this Frequently Asked Questions is only a summary and is not intended to be a comprehensive analysis of the rules and regulations applicable to registered investment advisers. It is not intended to constitute legal or compliance consulting advice or apply to any one investment adviser’s particular situation. For more information, please see our Terms of Use.

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