Amended SEC Rule 204-2: What Investment Advisers Need to Know?

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The Rule 204-2 of the Investment Advisers Act of 1940 is one of the most important rules issued by the Securities and Exchange Commission (SEC) as it specifies the various categories of books and records that investment advisers must retain and produce upon request during SEC examination.

Under this rule, investment advisors must keep certain books and records – including electronic communications such as text messages and chat logs. On August 25, 2016, the SEC adopted amendments to Form ADV and Rules 204-2 (a)(7) and (a)(16).

Under the revised and final rule, advisers are now required to maintain additional records related to the calculation and distribution of performance data. Performance data refers to figures on rates of return or performance on managed accounts that majority of investment advisers offer to their clients.

Additionally, the SEC now requires advisers to retain originals of all written communications received and copies of written communications sent by an investment adviser relating to the performance or rate of return of any or all managed accounts or securities recommendations.

Financial institutions, therefore, must ensure that these additional records are being produced and maintained for all investors receiving performance data as these data will be used by OCIE to evaluate adviser performance claims. According to the press release by SEC, it is said that these amendments will “reduce the incidence of misleading or fraudulent advertising and communications by advisers.”

Changes in Form ADV

In addition to changes in the record-keeping requirements, significant amendments also took effect at the information collected on the form ADV. Form ADV is the uniform form used by investment advisers to register with both the Securities and Exchange Commission (SEC) and state securities authorities.

SEC now also offer a method for “umbrella registration” on the form ADV. Though not mandatory, this method will help simplify the registration process for advisers and will also provide “additional and more consistent data about, and create a clearer picture of, groups of private fund advisers that operate a single advisory business through multiple legal entities.”

Other identifying information that must be disclosed in the Form ADV are:

  •   CIK information – The final rule now requires advisers to report any Central Index Key Number (CIK) Numbers assigned to them, regardless of public reporting company status.
  •   Social Media Sites –  The final rule now requires disclosure of any social media accounts used by the adviser where the adviser controls the content, including the addresses of the adviser’s social media pages. While there is no definition of “social media platforms,” the Amended Form ADV and Schedule D include Twitter, Facebook, and
  •   Office Location and Activity Disclosure –  Advisers must report the total number of offices where they offer investment advisory services and the 25 largest offices (by number of employees).
  •   Chief Compliance Officer Outsourcing – Advisers are required to report whether or not its CCO is compensated or employed by any person other than the adviser (or a related person of the adviser) for providing chief compliance officer services to the adviser.
  •   Adviser Asset Approximation – Advisers are now required to report their assets (e., balance sheet assets, not assets under management) within the following ranges: $1 billion to less than $10 billion, $10 billion to less than $50 billion, and $50 billion or more.

Rule 204-2 (a)(7) and Electronic Communications Archiving

Rule 204-2(a)(7) requires advisers to maintain certain categories of written communications received and copies of written communications sent by advisers.

The categories include all written communications received and copies of all written communications sent by advisers relating to any investment advice, buy/sell orders, receipt and distribution of funds or securities, and the performance of managed accounts or recommended securities.

Irrespective of the medium used, any adviser that sends or receives written communications covered under Rule 204-2 is responsible for maintaining those records. If, for example, an adviser places an order on a messaging platform such as WhatsApp or confirms receipt of funds via Apple’s iMessage, then that adviser is responsible for maintaining records of those communications.

Overall, any emails, SMS, or other communications by advisers that include performance information must have appropriate books and records retention and back-up to ensure compliance with this rule. To meet this requirement, it is imperative for financial organizations to have policies and procedures in place to ensure that all communications by their advisers and representatives are retained on a reliable archiving platform.

TeleMessage, a global leader in innovative SaaS messaging and mobility solutions for enterprises, offers all these archiving features to companies under SEC archiving requirements through our Mobile Archiver solution. With our platform, we can help you meet the various compliance mandates for managing electronic records including SMS texts, encrypted communications, direct message or any other type of electronic messaging system.

Choose the Archiving Method that Works for You

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