IA Compliance:

Record Keeping Preparation for a Regulatory Examination

The following information reflects the views of NASAA’s Investment Adviser Section Resources and Publications Project Group.  It does not necessarily represent the views of NASAA, and it is not intended as legal advice. Any questions should be directed to the appropriate state regulators.

Are your firm’s books and records ready for an examination? A little planning can better prepare firms for a smooth and efficient regulatory examination. Whether the firm is new or established, it is important to regularly review the firm’s current record keeping procedures and update them as necessary. This article will provide an overview of the records that are required to be maintained, factors to consider when determining how to store records, and procedures that should be in place to update and maintain the firm’s records.

What Records Are Required to be Kept?

All investment adviser firms are required to keep certain records in an easily accessible place for five years. Below are some categories of records firms may be requested to provide during the course of an examination:

• Financial records:
  • Journals, including cash receipts and disbursements records
  • General ledgers reflecting asset, liability, equity, capital, income and expense accounts
  • Bank and credit card statements
• Compliance records:
  • Written supervisory policies and procedures
  • ADV updates and other regulatory filings
  • Disclosure documents such as prospectuses and subscription agreements
  • Communication with regulators
  • Investment product due diligence
• Client records:
  • List of all client accounts
  • List of all client accounts over which the firm has discretion
  • Advisory agreements
  • Suitability information
  • Written communications (including electronic transmissions such as emails and messages)
  • Client meeting notes and work products
  • Fee invoices
• Advertising records:
  • Websites and social media accounts
  • Letterhead and business cards
  • Newsletters and articles
  • Performance data
• Custodian records:
  • Custodian agreements
  • Client purchases and sales history
  • Current client securities statements
  • Trade errors

Determining How to Store Records

Firms should consider organizing their books and records to facilitate prompt production to regulators regardless of the format and location. While both paper and electronic records are permissible storage options, many regulators prefer to receive electronic records.

Regardless of how the records are stored a firm should be prepared to respond to regulatory requests. This is true even if the firm’s records are maintained at a separate location, or if the adviser spends time away from their principal office (e.g., maintaining two homes or seasonal travel).

It may be helpful to think about how your regulator requests the records and organize them accordingly. For example, if a regulator requests a specific client file, how will the firm access and produce all the relevant records, including the advisory contract, written correspondence, client meeting notes, and suitability information? If firms maintain this information in different locations or in different applications, it may be more difficult to promptly locate and produce the records. However, records organized in a format that allows for efficient recall make meeting production deadlines easier.

Books and records require security and safeguarding due to their sensitive nature. This may include physical security, cybersecurity, duplicates or backups. Whether records are stored in a paper or electronic format, firms should be able to easily access a duplicate in order to ensure its business continuity in case the original is destroyed or not accessible. For additional information on business continuity and cybersecurity check out NASAA’s Resources for Investment Advisers.

Record keeping requirements do not end when a firm ceases to do business. Records must be kept for a period of five years after the firm has terminated or withdrawn their registration.

Record Keeping Policy and Procedures

A well-crafted set of policies and procedures can help a firm effectively organize and keep track of books and records. When crafting the firm’s policy and procedures, make sure to address the various aspects of record keeping. Policies and procedures should address the who, what, when, where, and how of the firms record keeping practices. Some questions the firm should address include, but are not limited to:

• Who:
  • is responsible for maintaining the records?
  • has access to the records?
  • is communicating with regulators about the examination?
• What:
  • records need to be stored?
  • format will records be maintained in?
• When:
  • will audits of records be conducted by the firm?
  • will records be updated?
  • can records be destroyed?
• Where:
  • will the records be stored?
  • will back-ups be stored?
• How:
  • will you organize the records?
  • will you protect the records?
  • will you provide the records to regulators?

Bottom Line

Firms are required to maintain certain books and records, so understanding exactly what is required, determining how to keep those records, and developing tailored policies and procedures will enable a firm to produce books and records in a prompt manner. Responding to a regulator’s request promptly can reduce the length of an examination.

For additional information contact the firm’s state securities regulator or check out NASAA’s Industry Resources for Investment Advisers.