On August 25, 2016, Registered Investment Advisers (“RIAs”) received the news that the SEC adopted amendments intended to enhance the reporting and disclosure of information provided by them to investors and the Commission. The SEC also amended the Books and Records Rule as it relates to performance-related communications. Beginning on October 1, 2017, RIAs will be required to retain communications dealing with performance or rate of return for all managed accounts or securities recommendations. RIAs must also keep records demonstrating how they calculated the performance referred to in those communications.
Currently, RIAs need only retain books and records to substantiate performance-related communications distributed to ten or more persons. The books and records amendments replaced the language referring to “ten or more persons” with “any person.” With this particular change, the SEC is sending a loud and clear message that all performance-related communications must be truthful, not just advertisements.
The SEC amended Rule 204-2(a)(16) under the Investment Advisers Act of 1940, which requires RIAs to maintain all accounts, books, internal working papers, and any other records or documents that are necessary to calculate the performance or rate of return for all managed accounts or securities recommendations referred to in any communication that is circulated or distributed either directly or indirectly. After October 1, 2017, the record-keeping requirement will apply to any communication of that kind. The current version of the rule limits an RIA’s record-keeping obligation to those kinds of communications that are sent to ten or more persons.
The record-keeping amendments also expanded Rule 204-2(a)(7) under the Investment Adviser Act. Currently, Rule 204-2(a)(7) requires RIAs to make and keep the following:
Originals of all written communications received and copies of all written communications sent by such investment adviser relating to (i) any recommendation made or proposed to be made and any advice given or proposed to be given, (ii) any receipt, disbursement or delivery of funds or securities, or (iii) the placing or execution of any order to purchase or sell any security.
Instead of being limited to these categories of written communications, RIAs will also be required to maintain all written communications containing the performance or rate of return for any or all managed accounts or securities recommendations.
Once October 1, 2017 arrives, RIAs must retain e-mails and other forms of written communication distributed or circulated, even if the performance discussed occurred prior to that point in time. Furthermore, firms must retain the back-up documentation from before the compliance date if it is necessary to prove the accuracy of their performance-related communications after October 1, 2017.
The SEC did carve out an exception to the new record-keeping requirements. RIAs are not required to retain any unsolicited market letters, or similar communications of general public distribution, which were not prepared by or for the investment adviser.
The goal of these Books and Records Rule amendments is to ensure that investors are not misled by any form of misleading or fraudulent communication, whether it is a letter, e-mail, or an advertisement. The SEC believes that these changes will protect investors. They will also help the SEC to find out if RIAs are distorting their performance returns.
Although examiners will not expect RIAs to retain these records until October 1, 2017, firms should consider collecting them now as a best practice. The amendments to Form ADV and the Books and Records Rule can be found at https://www.sec.gov/rules/final/2016/ia-4509.pdf.