October 5, 2017 / 7:38 PM / 10 months ago

October brings increased performance record keeping requirements

NEW YORK (Thomson Reuters Regulatory Intelligence) - October brings changes to the amount of information investment advisers must disclose on the Form ADV, and it also brings a revision to record keeping requirements for advisers offering performance data for clients.

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A majority of investment advisers offer their clients, whether directly or indirectly, figures on rates of return or performance on managed accounts or securities recommendations.

Firms producing performance data after October 1st are required to maintain additional records related to the calculation and sharing of performance information, to be compliant with portions of Rule 204-2 of the Investment Advisers Act(here

The SEC adopted amendments in September of 2016(here that included eliminating an exemption allowing advisers to distribute performance information to 10 or fewer persons without maintaining supporting performance records.

In addition, the SEC now requires advisers to maintain 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.

A firm must ensure these additional records are being created and maintained for all accounts receiving performance data as these records will be used by the SEC to evaluate adviser performance claims. In the press release(here, SEC said it hopes this will reduce the incidence of misleading or fraudulent advertising and communications by advisers.


In addition to the changes to the record-keeping rule, a majority of the amendments that took effect this month are aimed at the information collected on the Form ADV.

The SEC will now require firms to report information concerning their social media presence and chief compliance officer compensation. It will also also offer a method for ‘umbrella registration’ on the Form ADV.

In addition, the SEC collects more specific information about advisers’ separately managed accounts (SMAs). In specific, the SEC added questions in Item 5 of Form ADV with respect to the type of asset held by the SMAs, the use of derivatives, borrowing and the role of custodians. The SEC is also enhancing the Information related to the number of the investment adviser’s clients and the amount of regulatory assets attributable to regulatory accounts.

Lastly, the SEC is requiring increased disclosure concerning the number of office locations and information about the adviser’s 25 largest offices in terms of employee number, requesting a specific range of total assets for advisers with $1 billion or more, and requiring that a firm with parallel managed accounts must report those regulatory assets under management.

RULE 204-2(a)(16)

Rule 204-2(a)(16) requires advisers registered with the SEC to maintain records that support performance claims in communications that are distributed or circulated to 10 or more persons(here

The amendment has removed the 10 or more persons condition, requiring advisers to maintain certain materials that demonstrate the calculation of the performance or rate of return in any communication that the adviser circulates or distributes, directly or indirectly, to any person.

The advisers must maintain all statements, 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 in any notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication that the investment adviser circulates or distributes, directly or indirectly.

For example, a firm must have steps in place to maintain the working papers for a one-on-one performance report sent via email or performance numbers provided via custodial statement. In addition, the records retained must reflect the entire rate of return period. If the period begins with inception, for example, a firm must be prepared to produce records or evidence for the complete period.

The record requirement may also be integrated into a firm’s training program. For example, a representative calculating and offering an impromptu rate of return for a client must know the record retention implications.

RULE 204-2(a)(7)

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

Generally speaking, the categories include all written communications received and copies of all written communications sent by advisers relating to any recommendation, disbursement or delivery of funds/securities and orders to purchase or sell.

The October amendments have expanded the categories to all written communications related to performance or rate of return of any or all managed accounts or securities recommendations.

Therefore, advisers must install policies and procedures to ensure that all communications by the adviser and its representatives are retained on the adviser’s record-keeping system. For example, any emails, texts or other communications by employees that include performance information must have appropriate books and records retention and back-up.

In addition, these performance communications are subject to the record-keeping retention guidelines; typically they shall be maintained and preserved in an easily accessible place for a period of not less than five years, the first two years in an appropriate office of the adviser.

(Jason Wallace is a senior editor for Thomson Reuters Regulatory Intelligence. Jason began his career at TD Waterhouse Securities Inc., now TD Ameritrade Inc., where he held key positions in the Trading, Risk Management and Compliance departments for both retail and institutional sides of the firm. Jason joins Thomson Reuters after serving as an associate director for National Regulatory Services, in San Diego, California. Follow Jason on Twitter @Wallace_iabrief. Email Jason at jason.wallace@thomsonreuters.com)

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Oct. 2. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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