RIA Compliance and Practice Management Blog

Books and Records Requirements: What an RIA Needs to Know

Posted by RIA in a Box

Apr 14, 2021 4:02:57 PM

Records Concept. Word on Folder Register of Card Index. Selective Focus.

Recordkeeping requirements for registered investment adviser (“RIA”) firms are set at a high bar. After all, your firm is dealing with vital personal documents for people and businesses. This is an important vault, and you need quick, easy access to the paper trail for several reasons.

SEC Rule 204-2 requires true, accurate and current records of the major categories we’ll explore here. That used to mean a storage unit full of boxes of files and now it might be a thumb drive or a digital vault in the cloud, but the content and intent are the same: accurate records, preserved in their original state, organized for easy retrieval.

Below we will highlight the major categories of records required for RIAs and the characteristics of each.

Records Pertaining to Business and Financial Accounts

As with any business when money changes hands, there needs to be a record. The Books and Records Rule 204-2 gives an exhaustive list of requirements:

  • A journal or journals, including cash receipts and disbursements, records, and any other records of original entry forming the basis of entries in any ledger.
  • General and auxiliary ledgers (or other comparable records) reflecting asset, liability, reserve, capital, income and expense accounts.
  • All checkbooks, bank statements, canceled checks and cash reconciliations of the investment adviser.
  • All bills or statements (or copies thereof), paid or unpaid, relating to the business of the investment adviser as such.
  • All trial balances, financial statements, and internal audit working papers relating to the business of such investment advisor.

If you need a bank statement three years from now, you should be able to access it quickly and present it in good shape. This is not just a matter of keeping track of the contents of the statement, but of the document itself.

Records Pertaining to Investment Advice and Transactions in Client Accounts

In general, your firm must archive all written communications received and sent in relation to recommendations or advice, transactions of securities or funds, and all buy or sell orders.

If an advisor rebalances a client’s portfolio, all transactions need to be recorded, and so do the emails, any attachments, and other communications related to those transactions. You’ll not only have a paper trail on the rebalancing, but on the recommendations that drove the process.

Records Pertaining to Client Communications and Recommendations

Correspondence with clients and prospects should also be collected and properly archived. This is more than just receipts of transactions, but also includes originals of all communications received and copies of all communications sent. This process can be simplified by implementing technology solutions to automate the collection, storage, review and retrieval processes.

When recommending a Roth conversion to a client preparing for retirement, it is imperative to record the entire process, from brainstorming to completing the conversion. This not only keeps explicit record of a client’s consent but helps to safeguard your firm for the future if legal issues arise.

Records that Document Your Authority to Conduct Business in Client Accounts

Your firm needs to keep an accurate record of licenses and designations your advisers and other staff carry. Each investment adviser representative (“IAR”) needs a specific, separate file. Your firm will need a list of all IARs that indicate which states they are licensed in and documentation of the states your firm is licensed in.

This can be particularly important during the pandemic as remote work and online consultation are the new normal. You could eventually be serving clients from all over the country, so you want to make sure your registrations coincide with that and that you have the files to back that up.

Records Pertaining to Advertising and Performance Records

Rule 204-2 requires all advisory firms to retain all communications that the firm has circulated to 10 or more persons in the designated advertising file. That means whether you printed a flyer or ran an ad on a social media platform, such as Facebook, you will need to keep a record of those activities.

Firms should take great caution doing performance advertising in general, because of the additional scrutiny from the SEC and state regulators. If you go down this road, tread carefully and keep detailed records of the process.

Records Pertaining to the Code of Ethics Rule

A current Code of Ethics, and any version of it in the last five years, must be retained. There must be a record of any violation of the code and any “watch list” or “grey lists.” Employee acknowledgments need to be archived as well.

This protects your firm for several reasons. Imagine a scenario in which a former employee is sued and you need to access the documentation confirming that they signed your Code of Ethics when they came to your firm. Such a line of defense can be invaluable.

Records Pertaining to Registration and Client Disclosure Documents

According to Rule 204-2(a)(14):

You are required to maintain a copy of each disclosure document and each amendment or revision to it that was given or sent to clients or prospective clients, along with a record reflecting the dates on which such disclosure was given or offered to be given to any client or prospective client who subsequently became a client.

In other words, you need to retain every disclosure ever sent to clients and prospective clients, along with the details of when it was sent.

Records Pertaining to Solicitor Arrangements

If you use a solicitor for referrals, your process must be well-documented. Keep the written acknowledgments of solicitor disclosures, a list of all parties compensated for soliciting (cash and non-cash compensation) and all agreements with third-party solicitors. You're also required to keep a list of all clients for whom you’re paying the solicitor fee. If a firm uses a solicitor solely for leads and takes the work from there in terms of customer service, the original solicitor involvement still needs to be documented.

For SEC firms, under the new advertising and solicitation rule, the RIA should keep a copy of any testimonial or endorsement soliciting clients to utilize the RIA’s services. You must also keep a copy of the accompanying disclosure and have documentation substantiating your reasonable basis for believing that the testimonial or endorsement complies with Rule 206(4)-1. Additionally, for any compensation beyond the de minimis threshold ($1,000 over a twelve month period), you must maintain a written agreement with the solicitor documenting the scope of the agreed-upon solicitation activities and the terms of compensation for those activities.

Records Pertaining to Policies and Procedures Adopted and Implemented Under Compliance Program Rule

Any changes your firm has made for compliance purposes should also be documented. The issues—and any measures taken to address them—should be recorded and related correspondence kept long term. This helps to protect you legally and helps to show that you have tackled issues as they arose.

Records Pertaining to Political Contributions

Interacting with politicians or political parties also requires documentation. If your firm takes on a client that is a politician or works for a political party (perhaps working on a campaign, etc.), you need to keep appropriate records. Also, keep records of any political contributions you or your staff have made.

RIA in a Box offers the MyRIACompliance®️ compliance software to help you easily track these contributions and much more.

Records Pertaining to Custody of Client Assets

Rule 206(4)-2(a)(6)(ii) sets forth the requirements for RIAs that act as a qualified custodian for client assets. A separate ledger for each account must be kept, with a record of all purchases, sales, receipts, and deliveries of securities (including certificate numbers) and all other credits and debits to these accounts.

Records Pertaining to Proxy Voting on Behalf of Clients

If an IAR at your firm votes on behalf of a client, they must do so in accordance with Rule 206(4)-6, and keep a copy of each proxy statement, records of each vote cast, and copies of correspondence around proxy voting.

As you can see, record-keeping alone can be a very complex topic. Consult with your compliance professionals to ensure your firm is up to date on all requirements.

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Topics: RIA Operations, RIA Compliance, RIA Technology

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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