Scarinci Hollenbeck, LLC
The Firm
201-896-4100 info@sh-law.comAuthor: Scarinci Hollenbeck, LLC|March 6, 2019
Technology makes it easy for investment advisers to communicate with clients. However, it is important to remember that many of the “old” rules still apply. In a recent National Exam Program Risk Alert, the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) reminded the regulated community that the Investment Advisers Act of 1940 (Advisers Act) often applies to electronic messages, such as text messages, instant messages, and social media posts.
OCIE conducted a limited-scope examination initiative of registered investment advisers (advisers) designed to obtain an understanding of the various forms of electronic messaging used by advisers and their personnel, as well as the risks of such use. The resulting Risk Alert “reminds” advisers of their obligations under the Advisers Act that may apply to electronic messages and provides “examples of practices that the staff believes may assist advisers” to improve their relevant systems, policies and procedures. Before examining the SEC’s guidance, the Advisers Act “Books and Records Rule,” Advisers Act Rule 204-2 is summarized.
The “Books and Records Rule,” Advisers Act Rule 204-2, requires advisers to make and keep certain books and records relating to their investment advisory business. For example, Rule 204-2(a)(7) requires advisers to make and keep “[o]riginals 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, (iii) the placing or execution of any order to purchase or sell any security, or (iv) the performance or rate of return of any or all managed accounts or securities recommendations,” subject to certain limited exceptions.
Additionally, Rule 204-2(a)(11) requires advisers to make and keep a copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication that the investment adviser circulates or distributes, directly or indirectly, to ten or more persons. The SEC previously advised that, “regardless of whether information is delivered in paper or electronic form, broker-dealers and investment advisers must reasonably supervise firm personnel with a view to preventing violations.” Additionally, Advisers Act Rule 206(4)-7 (the “Compliance Rule,”) requires advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules.
Usage developments in the way mobile and personally owned devices are used pose challenges for advisers in meeting their obligations under both the Books and Records Rule and the Compliance Rule. OCIE broadly defines “electronic messaging” or “electronic communication” to include written business communications conveyed electronically using, text/SMS messaging, instant messaging, personal email, and personal or private messaging. OCIE included communications when conducted on the adviser’s systems, third-party applications, platforms or sent using the adviser’s computers, mobile devices issued by advisory firms, or personally owned computers or mobile devices used by the adviser’s personnel in the adviser’s business.
Examples of practices OCIE identified as helpful to advisers in meeting their record retention obligations under the Books and Records Rule and implementation and design of policies and procedures under the Compliance Rule:
(ii) monitor for prohibited apps, and (iii) “wipe” the device of all locally stored information if the device were lost or stolen.
One of the keys to compliance program success is a continuous assessment of Company risks and improvements to existing policies/procedures as determined to be necessary. With respect to electronic messaging, it is important to remain current with emerging technology. Lastly, monitoring regulatory developments provides useful guidance for the Company’s Compliance and Legal departments.
If you have any questions or if you would like to discuss the matter further, please contact me, Paul Lieberman, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
The Firm
201-896-4100 info@sh-law.comTechnology makes it easy for investment advisers to communicate with clients. However, it is important to remember that many of the “old” rules still apply. In a recent National Exam Program Risk Alert, the Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) reminded the regulated community that the Investment Advisers Act of 1940 (Advisers Act) often applies to electronic messages, such as text messages, instant messages, and social media posts.
OCIE conducted a limited-scope examination initiative of registered investment advisers (advisers) designed to obtain an understanding of the various forms of electronic messaging used by advisers and their personnel, as well as the risks of such use. The resulting Risk Alert “reminds” advisers of their obligations under the Advisers Act that may apply to electronic messages and provides “examples of practices that the staff believes may assist advisers” to improve their relevant systems, policies and procedures. Before examining the SEC’s guidance, the Advisers Act “Books and Records Rule,” Advisers Act Rule 204-2 is summarized.
The “Books and Records Rule,” Advisers Act Rule 204-2, requires advisers to make and keep certain books and records relating to their investment advisory business. For example, Rule 204-2(a)(7) requires advisers to make and keep “[o]riginals 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, (iii) the placing or execution of any order to purchase or sell any security, or (iv) the performance or rate of return of any or all managed accounts or securities recommendations,” subject to certain limited exceptions.
Additionally, Rule 204-2(a)(11) requires advisers to make and keep a copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication that the investment adviser circulates or distributes, directly or indirectly, to ten or more persons. The SEC previously advised that, “regardless of whether information is delivered in paper or electronic form, broker-dealers and investment advisers must reasonably supervise firm personnel with a view to preventing violations.” Additionally, Advisers Act Rule 206(4)-7 (the “Compliance Rule,”) requires advisers to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules.
Usage developments in the way mobile and personally owned devices are used pose challenges for advisers in meeting their obligations under both the Books and Records Rule and the Compliance Rule. OCIE broadly defines “electronic messaging” or “electronic communication” to include written business communications conveyed electronically using, text/SMS messaging, instant messaging, personal email, and personal or private messaging. OCIE included communications when conducted on the adviser’s systems, third-party applications, platforms or sent using the adviser’s computers, mobile devices issued by advisory firms, or personally owned computers or mobile devices used by the adviser’s personnel in the adviser’s business.
Examples of practices OCIE identified as helpful to advisers in meeting their record retention obligations under the Books and Records Rule and implementation and design of policies and procedures under the Compliance Rule:
(ii) monitor for prohibited apps, and (iii) “wipe” the device of all locally stored information if the device were lost or stolen.
One of the keys to compliance program success is a continuous assessment of Company risks and improvements to existing policies/procedures as determined to be necessary. With respect to electronic messaging, it is important to remain current with emerging technology. Lastly, monitoring regulatory developments provides useful guidance for the Company’s Compliance and Legal departments.
If you have any questions or if you would like to discuss the matter further, please contact me, Paul Lieberman, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
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