02-032 C.M.R. ch. 515, § 7 - Record keeping requirements for investment advisers

1. Record Keeping Requirements for All Investment Advisers. Every investment adviser licensed or required to be licensed under the Act shall make and keep true, accurate and current the following books, ledgers and records:

A. 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.

B. General and auxiliary ledgers, or other comparable records, reflecting asset, liability, reserve, capital, income and expense accounts.

C. A record of the investment adviser's securities transactions.

(1) The investment adviser shall prepare a memorandum setting forth:

(a) each order given by the investment adviser for the purchase or sale of any security;

(b) any instruction received by the investment adviser from the client concerning the purchase, sale, receipt or delivery of a particular security; and,

(c) any modification or cancellation of any such order or instruction.

(2) The memorandum shall:

(a) show the terms and conditions of the order, instruction, modification or cancellation;

(b) identify the person:

(i) connected with the investment adviser who recommended the transaction to the client, and

(ii) who placed the order;

(c) show:

(i) the account for which entered;

(ii) the date of entry; and

(iii) the bank or broker-dealer by or through which executed where appropriate; and

(d) designate orders entered pursuant to the exercise of discretionary power.

D. All check books, bank statements, canceled checks and cash reconciliations of the investment adviser.

E. All bills or statements, or copies of bills or statements, paid or unpaid, relating to the investment adviser's business as an investment adviser.

F. All trial balances, financial statements prepared in accordance with generally accepted accounting principles, and internal audit working papers relating to the investment adviser's business as an investment adviser. For purposes of this paragraph, "financial statements" shall mean a balance sheet prepared in accordance with generally accepted accounting principles, an income statement, a cash flow statement and a net worth computation, if applicable, as required by Section 12 of this chapter.

G. Records of the investment adviser's written communications

(1) The investment adviser shall keep originals of all written communications received and copies of all written communications sent by the investment adviser relating to:

(a) any recommendation made or proposed to be made and any advice given or proposed to be given;

(b) any receipt, disbursement, or delivery of funds or securities; and

(c) the placing or execution of any order to purchase or sell any security.

(2) The investment adviser shall not be required to keep any unsolicited market letters and other similar communications or general public distribution not prepared by or for the investment adviser.

(3) If the investment adviser sends any notice, circular, or other advertisement offering any report, analysis, publication, or other investment advisory service to more than ten (10) persons, the investment adviser shall not be required to keep a record of the names and addresses of the persons to whom it was sent. However, if the notice, circular, or advertisement is distributed to persons named on any list, the investment adviser shall retain with the copy of the notice, circular, or advertisement a memorandum describing the list and its source.

H. A list or other record of all accounts which identifies the accounts in which the investment adviser is vested with any discretionary power with respect to the funds, securities or transactions of any client.

I. A copy of all powers of attorney and other evidence of the granting of any discretionary authority by any client to the investment adviser.

J. A copy in writing of each agreement entered into by the investment adviser with any client, and all other written agreements otherwise relating to the investment adviser's business as an investment adviser.

K. A file containing a copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including by electronic media, that the investment adviser circulates or distributes, directly or indirectly, to two or more persons, other than persons connected with the investment adviser. If the notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication, including by electronic media, recommends the purchase or sale of a specific security and does not state the reasons for the recommendation, the investment adviser shall retain a memorandum of the investment adviser indicating the reasons for the recommendation.

L. Records of transactions in securities in which the investment adviser or an affiliated person has a beneficial ownership interest.

(1) The investment adviser shall keep a record of every transaction in a security in which:

(a) the investment adviser; and

(b) any person described in Subparagraphs (2) or (3), whichever is applicable; has, or by reason of any transaction acquires, any direct or indirect beneficial ownership.

(2) For all investment advisers except those that are primarily engaged in a business or businesses other than advising investment advisory clients, records of transactions shall include records of the transactions of:

(a) any partner, officer, or director of the investment adviser;

(b) any employee who participates in any way in the determination of which recommendations are made;

(c) any employee who, in connection with his or her duties, obtains any information concerning which securities are being recommended prior to the effective dissemination of the recommendations; and

(d) any of the following persons who obtain information concerning securities recommendations being made by the investment adviser prior to the effective dissemination of the recommendations:

(i) any person in a control relationship to the investment adviser;

(ii) any affiliated person of a controlling person; and

(iii) any affiliated person of any affiliated person.

(3) For investment advisers that are primarily engaged in a business or businesses other than advising investment advisory clients, records of transactions shall include records of the transactions of:

(a) any partner, officer, director, employee of the investment adviser:

(i) who participates in any way in the determination of which recommendations are made, or

(ii) who, in connection with his or her functions or duties, obtains any information concerning which securities are being recommended prior to the effective dissemination of the recommendations; and

(b) any of the following persons, who obtain information concerning securities recommendations being made by the investment adviser prior to the effective dissemination of the recommendations or of the information concerning the recommendations:

(i) any person in a control relationship to the investment adviser;

(ii) any affiliated person of a controlling person; and

(iii) any affiliated person of an affiliated person.

(4) For the purposes of this paragraph, the following definitions apply:

(a) "Affiliated person" with respect to another person means:

(i) any person directly or indirectly controlling, controlled by, or under common control with the other person;

(ii) any officer, director, or partner of the other person; or

(iii) any spouse or relative, by blood or marriage, of the other person.

(b) "Control" means the power to direct or influence the management or policies of a company through the ownership of voting securities, by contract, or otherwise. Any person who owns beneficially, either directly or through one or more controlled companies, more than twenty-five (25) percent of the voting securities of a company shall be presumed to control such company.

(c) "Primarily engaged in a business or businesses other than advising investment advisory clients" means an investment adviser that, for each of its most recent three (3) fiscal years or for the period of time since organization, whichever is lesser, derived, on an unconsolidated basis, more than fifty (50) percent of its:

(i) total sales and revenues; and

(ii) income or loss before income taxes and extraordinary items; from such other business or businesses.

(5) The investment adviser shall record each transaction no later than ten (10) days after the end of the calendar quarter in which the transaction was effected.

(6) The investment adviser is not required to keep records of transactions:

(a) effected in any account over which neither the investment adviser nor any person described in Subparagraphs (2) or (3) has any direct or indirect influence or control; and

(b) in securities which are direct obligations of the United States.

(7) The record shall state:

(a) the title and amount of the security involved;

(b) the date and nature of the transaction, such as purchase, sale or other disposition; and

(c) the name of the broker-dealer or bank with or through which the transaction was effected.

(8) An investment adviser shall not be deemed to have violated the provisions of this paragraph because of the failure to record securities transactions of any person described in Subparagraphs (2) and (3) if the investment adviser establishes that it instituted adequate procedures and used reasonable diligence to obtain promptly reports of all transactions required to be recorded.

M. A copy of each written statement and each amendment or revision, given or sent to any client or prospective client of the investment adviser in accordance with the provisions of Section 8 of this chapter, and a record of the dates that each written statement, and each amendment or revision, was given, or offered to be given, to any client or prospective client who subsequently becomes a client.

N. All accounts, books, internal working papers, and any other records or documents that are necessary to form the basis for or demonstrate the calculation of the performance or rate of return of all managed accounts or securities recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including but not limited to electronic media that the investment adviser circulates or distributes, directly or indirectly, to two (2) or more persons, other than persons connected with the investment adviser. However, with respect to the performance of managed accounts, the retention of all account statements, if they reflect all debits, credits, and other transactions in a client's account for the period of the statement, and all worksheets necessary to demonstrate the calculation of the performance or rate of return of all managed accounts shall be deemed to satisfy the requirements of this paragraph.

O. A file containing a copy of all written communications received or sent regarding any litigation involving the investment adviser or any investment adviser representative, or employee, and regarding any written customer or client complaint.

P. Written information about each investment advisory client that is the basis for making any recommendation or providing any investment advice to such client.

Q. Written procedures to supervise the activities of employees and investment adviser representatives that are reasonably designed to achieve compliance with applicable securities laws and regulations.

R. A file containing a copy of each document, other than any notices of general dissemination, that was filed with or received from any state or federal agency or self regulatory organization and that pertains to the licensee or its investment adviser representatives. The file shall contain, but is not limited to, all applications, amendments, renewal filings, and correspondence.

S. A record of the investment adviser's privacy policies, all privacy notices sent to consumers or customers and the date such notices were sent.

2. Additional Record Keeping Requirements for Investment Advisers That Have Custody of Client Securities or Funds. If an investment adviser subject to Sub-section 1 of this section has custody or possession of securities or funds of any client, the records required to be made and kept under Sub-section 1 above shall include:

A. A journal or other record showing all purchases, sales, receipts and deliveries of securities, including certificate numbers, for all accounts and all other debits and credits to the accounts;

B. A separate ledger account for each client showing all purchases, sales, receipts and deliveries of securities, the date and price of each purchase and sale, and all debits and credits;

C. Copies of confirmations of all transactions effected by or for the account of any client; and

D. A record for each security in which any client has a position, which record shall show the name of each client having any interest in each security, the amount or interest of each client, and the location of each security.

3. Additional Record Keeping Requirements for Investment Advisers That Render Investment Management Services. Every investment adviser subject to Sub-section 1 of this section that renders any investment supervisory or management service to any client shall, with respect to the portfolio being supervised or managed and to the extent that the information is reasonably available to or obtainable by the investment adviser, make and keep true, accurate and current: and

A. Records showing separately for each client the securities purchased and sold, and the date, amount and price of each purchase and sale;

B. Information from which the investment adviser can promptly furnish the name of each client, and the current amount or interest of the client, for each security in which any client has a current position.

4. Client Codes or Designations. Any books or records required by this section may be maintained by the investment adviser in such manner that the identity of any client to whom the investment adviser renders investment supervisory services is indicated by numerical or alphabetical code or some similar designation.

5. Manner of Record Preservation. Every investment adviser subject to Sub-section 1 of this section shall preserve the following records in the manner prescribed:

A. All books and records required to be made under the provisions of Sub-sections 1 and 2, and Paragraph 3(A) of this section, except for books and records required to be made under the provisions of Paragraphs 1(K) and 1(N) of this section, shall be maintained and preserved in an easily accessible place for a period of not less than six (6) years from the end of the fiscal year during which the last entry was made on record, the first two (2) years in the principal office of the investment adviser.

B. Partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor shall be maintained in the principal office of the investment adviser and preserved until at least six (6) years after termination of the enterprise.

C. Books and records required to be made under the provisions of Paragraphs 1(K) and 1(N) of this section shall be maintained and preserved in an easily accessible place for a period of not less than six (6) years, the first two (2) years in the principal office of the investment adviser, from the end of the fiscal year during which the investment adviser last published or otherwise disseminated, directly or indirectly, the notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including by electronic media.

D. Notwithstanding other record keeping requirements of this section, the following records or copies shall be required to be maintained at the business location of the investment adviser from which the customer or client is being provided or has been provided with investment advisory services:

(1) records required to be preserved under Paragraphs 1(C), 1(G)-1(J), 1(M), 1(O) -1(Q), and Sub-sections 2 and 3 inclusive, of this section; and

(2) records or copies required under the provision of Paragraphs 1(K) and 1(N) of this section which records or related records identify:

(a) the name of the investment adviser representative providing investment advice from that business location, or

(b) the business locations' physical address, mailing address, electronic mailing address, or telephone number.

The records shall be maintained for the period described in Subparagraphs (A), (B) and (C) of this sub-section.

6. Preservation of Records upon Cessation. An investment adviser subject to Sub-section 1 of this section, before ceasing to conduct or discontinuing business as an investment adviser, shall arrange for and be responsible for the preservation of the books and records required to be maintained and preserved under this section for the remainder of the period specified in this section, and shall notify the Administrator in writing of the exact address where the books and records will be maintained during the period.

7. Preservation of Records by Alternative Media

A. The records required to be maintained and preserved pursuant to this sub-section may be immediately produced by any form of data storage, as provided below, and maintained and preserved for the required time by an investment adviser on:

(1) micrographic media, including microfilm, microfiche, or any similar medium; or

(2) electronic storage media, including any digital storage medium or system that meets the terms of this sub-section.

B. The investment adviser must:

(1) arrange and index the records in a way that permits easy location, access, and retrieval of any particular record;

(2) provide promptly any of the following that the Administrator may request:

(a) a legible, true, and complete copy of the record in the medium and format in which it is stored;

(b) a legible, true, and complete printout of the record; and

(c) means to access, view, and print the records; and

(3) separately store, for the time required for preservation of the original record, a duplicate copy of the record on any medium allowed by this sub-section.

C. In the case of records on electronic storage media, the investment adviser may maintain and preserve records which, in the ordinary course of the investment adviser's business, are created by the investment adviser on electronic media or are received by the investment adviser solely on electronic media or by electronic data transmission. The investment adviser must establish and maintain procedures:

(1) to maintain and preserve the records, so as to reasonably safeguard them from loss, alteration, or destruction;

(2) to limit access to the records to properly authorized personnel and the Administrator, including examiners and other representatives; and

(3) to reasonably ensure that any reproduction of a non-electronic original record on electronic storage media is complete, true, and legible when retrieved.

8. Sectional Definitions. For purposes of this section, "investment supervisory services" means the giving of continuous advice as to the investment of funds on the basis of the individual needs of each client; and "discretionary power" shall not include discretion as to the price at which or the time when a transaction is or is to be effected, if, before the order is given by the investment adviser, the client has directed or approved the purchase or sale of a definite amount of the particular security.

Notes

02-032 C.M.R. ch. 515, § 7