An Investment Advisor Should Test Periodically Whether It Is Maintaining the Required Books & Records

March 29, 2012

A registered investment advisor is required to make and keep true, accurate and current certain books and records relating to its investment advisory business.  For investment advisors registered with the U.S. Securities and Exchange Commission (SEC), these required books and records are outlined in Rule 204-2 of the Investment Advisers Act of 1940 (“Advisers Act”).  Each investment advisor registered with the SEC should familiarize itself with the requirements of this rule in relation to the documents and reports that need to be maintained, where and for how long the documents must be maintained, and how the documents may be maintained.  Most books and records requirements for state registered investment advisors are the same as or similar to the SEC requirements, but each investment advisor needs to make sure that it familiarizes itself with the requirements of the appropriate governing authority.

Maintenance of books and records is something that should be covered in an investment advisor’s compliance program.  It is not enough just to know what needs to be maintained, an investment advisor should perform periodic testing to make sure that it is maintaining and can provide the appropriate documents.  One effective method of doing this is to have a mock examination performed of your investment advisor.  The investment advisor should take the list of required books and records and test whether it is prepared to present all required documents and if it can do so in a timely manner.  This is something that can be performed by an investment advisor’s own Compliance Department or an investment advisor can hire RIA Compliance Consultants for its Mock Regulatory Review service.

The following are some examples of common books and records deficiencies found by RIA Compliance Consultants when performing mock regulatory review services for investment advisors:

  • Not maintaining an order memorandum or not maintaining complete information in the order memorandum as outlined in Rule 204-2(a)(3) the Advisers Act;
  • Not maintaining current financial or complete financial records;
  • Not maintaining proper documentation to support performance advertising figures;
  • Not maintaining a list of all access persons for the past five years;
  • Not maintaining access person holdings reports;
  • Not maintaining records to support the firm’s duty of best execution;
  • Not maintaining or unable to locate contracts the firm has executed with service providers, sub-advisors, or solicitors;
  • Not able to easily or timely produce copies of requested email records; and
  • Not having complete or adequate written compliance programs or having written compliance programs that are not consistent with what the firm is actually doing.

If your investment advisor would like more information and guidance on maintaining the appropriate books and records for your registered investment advisor, join RIA Compliance Consultants for our upcoming webinar, “Maintaining Investment Adviser Books & Records,” hosted April 12, 2012, at 12:00pm CDT. Our consultants will not simply review Rule 204-2, but instead will provide an overview of the files, documents and reports a regulator may request during an examination of an investment advisor. Our consultants will also discuss some of the common investment advisor deficiencies relating to maintaining appropriate books and records. To register for this event, click here.

Posted by Bryan Hill
Labels: Books Records, Compliance Program, Compliance Training, Webinar