Rule 204-2(a)(3) of the Advisers Act requires adviser firms to maintain a memorandum or each order given by the adviser (also known as a trade ticket). The majority of states have similar recordkeeping requirements. The specific language from Rule 204-2(a)(3) reads as follows. Items in bold have been bolded for emphasis.
§ 275.204-2 Books and records to be maintained by investment advisers. (a) Every investment adviser registered or required to be registered under section 203 of the Act (15 U.S.C. 80b-3) shall make and keep true, accurate and current the following books and records relating to its investment advisory business; (3) A memorandum of each order given by the investment adviser for the purchase or sale of any security, and of any modification or cancellation of any such order or instruction. Such memorandum shall show the terms and conditions of the order, instruction, modification or cancellation; shall identify the person connected with the investment adviser who recommended the transaction to the client and the person who placed such order; and shall show the account for which entered, the date of entry, and the bank, broker or dealer by or through whom executed where the appropriate. Orders entered pursuant to the exercise of discretionary power shall be so designated.
One of the more common deficiencies RIA Compliance Consultants has noted during recent mock regulatory examinations centers on this rule. Specifically, it has been noted that firms have not properly documented three key requirements on the order memorandum or trade ticket; 1) the person who recommends the transactions to the client, 2) the person who placed the order, and 3) whether discretionary power was used over the trade. Many firms have designated personnel who are tasked with executing all transactions, but do actually come in contact with clients or make specific recommendations. It is vital for a firm to provide documentation proving who entered the trade versus who recommended the trade so that it does not appear that the person entering the trade also recommended the transaction. Personnel recommending transactions to clients will generally need to be licensed as investment advisor representatives. The trade ticket also needs to designate if the transaction is being done on a discretionary, non-discretionary, or unsolicited basis. This is extremely important from a risk management perspective for firms that typically execute trades on a discretionary basis, but will from time-to-time execute a non-discretionary or unsolicited trade. Your firm needs to be able to easily show when a trade is done on a non-discretionary or unsolicited basis if there is ever doubt in the future.
Stay tuned to RIA Compliance Consultants as we keep you up to date on other issues or requirements challenging investment advisor firms. If you would like to find out more about our services or reserve a date for a mock examination, give us a call.
Posted by Bryan Hill
Labels: Record Keeping