SEC Charges Adviser for Failing to Produce Books and Records

August 16, 2012 Comments Off on SEC Charges Adviser for Failing to Produce Books and Records

A recent SEC enforcement action serves as a reminder to investment advisers of their obligations to keep detailed records of their advisory business and to provide those records promptly when examined by the SEC (or state regulators). Failure to satisfy these regulatory obligations can lead to suspension of firm’s registration and, for the firm’s principals, a bar from the industry.

As part of a 2010 examination, the SEC requested records from a Florida-based investment manager related to its management of a mutual fund that invested in NASCAR-related stocks. Despite repeated assurances, the firm never provided the documents. The SEC has charged both firm  with willfully violating the recordkeeping rules and the principal with willfully aiding and abetting those violations. Additional charges related to the firm’s failure to provide the same records to the board of the mutual fund.

Every SEC-registered investment adviser is required to maintain the following categories of books and records related to its business:

  1. A journal or journals and any other records of original entry forming the basis of entries in any ledger.
  2. General and auxiliary ledgers reflecting asset, liability, reserve, capital, income and expense accounts.
  3. A memorandum of each order given, or instruction received, by the investment adviser for the purchase or sale of any security.
  4. All check books, bank statements, cancelled checks and cash reconciliations.
  5. All bills or statements relating to the business.
  6. All trial balances, financial statements, and internal audit working papers relating to the business.
  7. All written communications received and sent relating to recommendations, receipt or delivery of funds or securities, execution of order to purchase or sell securities.
  8. A list all accounts where the adviser is vested has discretionary power.
  9. All powers of attorney and other evidence of the grant of discretionary authority.
  10. All written agreements entered into by the investment adviser with any client or otherwise relating to the business.
  11. A copy of each notice, advertisement, investment letter, bulletin or other communication that the adviser distributes to 10 or more persons (including support for any investment recommendation if not included in the notice or advertisement itself).
  12. The adviser’s code of ethics and records related to its operation.
  13.  Reports by the adviser’s access persons.
  14.  The adviser’s ADV Part 2 brochure and brochure supplements and a summary of any material changes; support for the adviser’s calculation of managed assets in the Part 2 brochure if it differs from the method used for Form ADV Part 1; and a memorandum describing certain legal or disciplinary events.
  15.  Acknowledgments of receipt from clients related to cash payments for client solicitation.
  16.  All records necessary to support the calculation of performance results used in any adviser notice or advertisement.
  17.  The adviser’s policies and procedures manual documentation of its annual review.
  18.  Certain records related to political contributions by the adviser or its personnel.

These records must be maintained and easily accessible for at least five years–the first two in the adviser’s offices.



Jack G. Martel is the author of Investment Adviser Law Blog which is devoted to providing information and discussion of interest to investment advisers, private fund managers and others in the financial management industry. Jack is a partner in Ragghianti | Freitas LLP. He has over fifteen years experience in general business and securities transactions with a focus on assisting investment advisers, fund sponsors and managers in all manner of legal, regulatory and compliance issues. Jack can be reached at 415.453.9433.

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