Books and Records Requirements for Advisers

For the average adviser, the prospect of managing the administrative and compliance aspects of the daily operations of the firm can be daunting.  This pressure is further multiplied by recent regulatory trends and enforcement actions, which ultimately result in an increased likelihood of a regulatory examination of your firm.  Given these trends, advisers need to be particularly concerned about the accuracy, quality, and completeness of the firm's books and records as required by Rule 204-2 of the Adviser’s Act (“The Act”).  The paragraphs below contain a few suggestions that advisers should consider regarding the creation and maintenance of their books and records relative to the requirements of The Act.

Rule 204-2

The Act specifies that books and records must be maintained on a "true, accurate, and current" basis as appropriate for the public interest or for the protection of investors.  It should be noted that although The Act is generally written to cover SEC registered advisers, most state regulators have adopted record- keeping requirements that mirror the SEC requirements.  Generally speaking, at the outset of an examination, a regulator will form an early "impression" of your advisory practice based upon the quality of your record keeping, and your ability to respond quickly to requests for information. 

Under Rule 204-2 of the Investment Advisers Act, there are 17 categories of required records.  These record keeping requirements apply to a vast array of topics ranging from the maintenance of the firm's financial records to records pertaining to the firm's communications with the public.  Additional record keeping requirements exist for advisers with custody and proxy voting authority, as well as for those advisers providing investment supervisory services on behalf of their clients.  Please visit http://www.sec.gov/rules/extra/iarules.htm#2042 to view the complete text of the rule.

E-mail

Of particular interest to examiners is the topic of email retention.   Any adviser subject to a regulatory examination in today's environment can expect to be asked to provide volumes of email for review.  Listed below are some general thoughts and guidelines pertaining to the topic of E-mail as it pertains “relates” in stead of pertains as just used it?  to the requirements of The Act:

Retain all e-mails that would constitute required records if they were in writing
Currently, it is acceptable to delete non-required emails, but advisers should be very cautious when doing so.  Internal procedures must be very specific as to what emails may or may not be deleted and controls must be in place to monitor compliance with these procedures.
E-mails may be printed and stored if desired (but be prepared to prove you have procedures and controls in place which ensure that ALL emails are captured by this process)
The SEC has the right to examine ALL e-mail, unless it is privileged (be prepared for the fact that the SEC may challenge your application of “privilege” if it appears suspicious or abusive).   Requested e-mails must be delivered promptly
Don’t be surprised if personal e-mails are requested (particularly if you are an executive, owner, or a member of senior management)
Any email captured as part of the “advisory” record keeping system is fair game for the regulators to examine – whether advisory related or not.

Getting Started

Advisers should start by documenting their firm's internal policies and procedures as they pertain to the creation and maintenance of books and records.  They should consider creating a master file or binder designed to quickly identify:

The required record under Rule 204-2
The person responsible for creating, maintaining, and preserving the record
The location where the record is stored (including offsite storage)
The format in which the record is stored (i.e.: electronic or paper)
The retention period for the record as required by law
The date the record was last reviewed

Retention Requirements

It is important to be aware that the retention requirement for most advisory records is 5 years (in an easily accessible place) from the date the last entry was made to the record, with the first 2 years in the office of the adviser.  "Easily Accessible" records held offsite must be retrievable within 24 hours.  There are notable exceptions to these rules that are specific to the preservation of advertising materials, performance reporting records, and organizational records.

Other Requests

Regulatory examiners typically ask for numerous records to be available for review, many of which are not "required" records as described in Rule 204-2.  Nonetheless, as a registered investment adviser, your firm is obligated to comply with such records requests.  In addition, certain books and records may be requested in electronic format to allow for easier analysis of data.

Ultimately, the keys to effectively managing your advisory practice in today's regulatory environment are 1) Being familiar with the advisory rules and regulations (and the requirements of them); 2) developing internal processes and procedures which effectively address these rules and regulations; 3) establishing "responsible persons" for record keeping relative to each function; 4) testing the system on a regular basis; and 5) modifying your procedures as appropriate to your business. 

Having an organized approach to your record keeping processes and procedures which reflect the points outlined above not only streamlines your business operations, but shows evidence of a good internal control system, which is a looked upon favorably by regulators during an examination.

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