Current through Register Vol. 41, No. 3, September 23, 2024
A. Every investment advisor registered or
required to be registered under the Act shall make and keep true, accurate and
current the following books, ledgers and records, except an investment advisor
having its principal place of business outside this Commonwealth and registered
or licensed, and in compliance with the applicable books and records
requirements, in the state where its principal place of business is located,
shall only be required to make, keep current, maintain and preserve such of the
following required books, ledgers and records as are not in addition to those
required under the laws of the state in which it maintains its principal place
of business:
1. A journal, including cash
receipts and disbursements records, and any other records of original entry
forming the basis of entries in any ledger.
2. General and auxiliary ledgers (or other
comparable records) reflecting asset, liability, reserve, capital, income and
expense accounts.
3. A memorandum
of each order given by the investment advisor for the purchase or sale of any
security, of any instruction received by the investment advisor from the client
concerning the purchase, sale, receipt or delivery of a particular security,
and of any modification or cancellation of any such order or instruction. The
memoranda shall show the terms and conditions of the order, instruction,
modification or cancellation; shall identify the person connected with the
investment advisor who recommended the transaction to the client and the person
who placed the order; and shall show the account for which entered, the date of
entry, and the bank, broker or dealer by or through whom executed where
appropriate. Orders entered pursuant to the exercise of discretionary power
shall be so designated.
4. All
check books, bank statements, canceled checks and cash reconciliations of the
investment advisor.
5. All bills or
statements (or copies of), paid or unpaid, relating to the business as an
investment advisor.
6. All trial
balances, financial statements prepared in accordance with generally accepted
accounting principles which shall include a balance sheet, income statement and
such other statements as may be required pursuant to
21VAC5-80-180,
and internal audit working papers relating to the investment advisor's business
as an investment advisor.
7.
Originals of all written communications received and copies of all written
communications sent by the investment advisor 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;
and (iii) the placing or execution of any order to purchase or sell any
security; however, (a) the investment advisor shall not be required to keep any
unsolicited market letters and other similar communications of general public
distribution not prepared by or for the investment advisor, and (b) if the
investment advisor sends any notice, circular or other advertisement offering
any report, analysis, publication or other investment advisory service to more
than 10 persons, the investment advisor shall not be required to keep a record
of the names and addresses of the persons to whom it was sent; except that if
the notice, circular or advertisement is distributed to persons named on any
list, the investment advisor shall retain with a copy of the notice, circular
or advertisement a memorandum describing the list and the source
thereof.
8. A list or other record
of all accounts which list identifies the accounts in which the investment
advisor is vested with any discretionary power with respect to the funds,
securities or transactions of any client.
9. All powers of attorney and other evidences
of the granting of any discretionary authority by any client to the investment
advisor, or copies thereof.
10. All
written agreements (or copies thereof) entered into by the investment advisor
with any client, and all other written agreements otherwise related to the
investment advisor's business as an investment advisor.
11. 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 advisor
circulates or distributes, directly or indirectly, to two or more persons
(other than persons connected with the investment advisor), and 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, a memorandum of the investment adviser indicating the reasons
for the recommendation.
12.
a.
A record of every transaction in a security in which the
investment advisor or any investment advisory representative of the investment
advisor has, or by reason of any transaction acquires, any direct or indirect
beneficial ownership, except (i) transactions effected in any account over
which neither the investment advisor nor any investment advisory representative
of the investment advisor has any direct or indirect influence or control; and
(ii) transactions in securities which are direct obligations of the United
States. The record shall state the title and amount of the security involved;
the date and nature of the transaction (i.e., purchase, sale or other
acquisition or disposition); the price at which it was effected; and the name
of the broker, dealer or bank with or through whom the transaction was
effected. The record may also contain a statement declaring that the reporting
or recording of any such transaction shall not be construed as an admission
that the investment advisor or investment advisory representative has any
direct or indirect beneficial ownership in the security. A transaction shall be
recorded not later than 10 days after the end of the calendar quarter in which
the transaction was effected.
b. For purposes of this subdivision 12, the
following definitions will apply. The term "advisory representative" means any
partner, officer or director of the investment advisor; any employee who
participates in any way in the determination of which recommendations shall be
made; any employee who, in connection with his duties, obtains any information
concerning which securities are being recommended prior to the effective
dissemination of the recommendations; and any of the following persons who
obtain information concerning securities recommendations being made by the
investment advisor prior to the effective dissemination of the recommendations:
(1) Any person in a control relationship to
the investment adviser;
(2) Any
affiliated person of a controlling person; and
(3) Any affiliated person of an affiliated
person.
"Control" means the power to exercise a controlling
influence over the management or policies of a company, unless such power is
solely the result of an official position with the company. Any person who owns
beneficially, either directly or through one or more controlled companies, more
than 25% of the ownership interest of a company shall be presumed to control
the company.
c. An
investment advisor shall not be deemed to have violated the provisions of this
subdivision 12 because of his failure to record securities transactions of any
investment advisor representative if the investment advisor establishes that it
instituted adequate procedures and used reasonable diligence to obtain promptly
reports of all transactions required to be recorded.
13.
a.
Notwithstanding the provisions of subdivision 12 of this
subsection, where the investment advisor is primarily engaged in a business
other than advising investment advisory clients, a record must be maintained of
every transaction in a security in which the investment advisor or any
investment advisory representative of such investment advisor has, or by reason
of such transaction acquires, any direct or indirect beneficial ownership,
except (i) transactions effected in any account over which neither the
investment advisor nor any investment advisory representative of the investment
advisor has any direct or indirect influence or control; and (ii) transactions
in securities which are direct obligations of the United States. The record
shall state the title and amount of the security involved; the date and nature
of the transaction (i.e., purchase, sale or other acquisition or disposition);
the price at which it was effected; and the name of the broker, dealer or bank
with or through whom the transaction was effected. The record may also contain
a statement declaring that the reporting or recording of any such transaction
shall not be construed as an admission that the investment advisor or
investment advisory representative has any direct or indirect beneficial
ownership in the security. A transaction shall be recorded not later than 10
days after the end of the calendar quarter in which the transaction was
effected.
b. An investment
advisor is "primarily engaged in a business other than advising investment
advisory clients" when, for each of its most recent three fiscal years or for
the period of time since organization, whichever is less, the investment
advisor derived, on an unconsolidated basis, more than 50% of (i) its total
sales and revenues, and (ii) its income (or loss) before income taxes and
extraordinary items, from such other business.
c. For purposes of this subdivision 13, the
following definitions will apply. The term "advisory representative," when used
in connection with a company primarily engaged in a business other than
advising investment advisory clients, means any partner, officer, director or
employee of the investment advisor who participates in any way in the
determination of which recommendation shall be made, or whose functions or
duties relate to the determination of which securities are being recommended
prior to the effective dissemination of the recommendations; and any of the
following persons, who obtain information concerning securities recommendations
being made by the investment advisor prior to the effective dissemination of
the recommendations or of the information concerning the recommendations:
(1) Any person in a control relationship to
the investment advisor;
(2) Any
affiliated person of a controlling person; and
(3) Any affiliated person of an affiliated
person.
d. An investment
advisor shall not be deemed to have violated the provisions of this subdivision
13 because of his failure to record securities transactions of any investment
advisor representative if he establishes that he instituted adequate procedures
and used reasonable diligence to obtain promptly reports of all transactions
required to be recorded.
14. A copy of each written statement and each
amendment or revision, given or sent to any client or prospective client of
such investment advisor in accordance with the provisions of
21VAC5-80-190
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.
15. For each client that was obtained by the
advisor by means of a solicitor to whom a cash fee was paid by the advisor, the
following:
a. Evidence of a written agreement
to which the advisor is a party related to the payment of such fee;
b. A signed and dated acknowledgement of
receipt from the client evidencing the client's receipt of the investment
advisor's disclosure statement and a written disclosure statement of the
solicitor; and
c. A copy of the
solicitor's written disclosure statement. The written agreement,
acknowledgement and solicitor disclosure statement will be considered to be in
compliance if such documents are in compliance with Rule 275.206(4)-3 of the
Investment Advisers Act of 1940.
For purposes of this regulation, the term "solicitor" means
any person or entity who, for compensation, acts as an agent of an investment
advisor in referring potential clients.
16. 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 electronic media that the investment advisor circulates
or distributes directly or indirectly, to two or more persons (other than
persons connected with the investment advisor); 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 subdivision.
17. A file containing a copy of all written
communications received or sent regarding any litigation involving the
investment advisor or any investment advisor representative or employee, and
regarding any written customer or client complaint.
18. Written information about each investment
advisory client that is the basis for making any recommendation or providing
any investment advice to the client.
19. Written procedures to supervise the
activities of employees and investment advisor representatives that are
reasonably designed to achieve compliance with applicable securities laws and
regulations.
20. 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 registrant or its investment advisor
representatives, which file should contain, but is not limited to, all
applications, amendments, renewal filings, and correspondence.
21. Any records documenting dates, locations
and findings of the investment advisor's annual review of these policies and
procedures conducted pursuant to subdivision F of
21VAC5-80-170.
22. Copies, with original signatures of the
investment advisor's appropriate signatory and the investment advisor
representative, of each initial Form U4 and each amendment to Disclosure
Reporting Pages (DRPs U4) must be retained by the investment advisor (filing on
behalf of the investment advisor representative) and must be made available for
inspection upon regulatory request.
23. Where the advisor inadvertently held or
obtained a client's securities or funds and returned them to the client within
three business days or has forwarded third party checks within three business
days of receipt, the advisor will be considered as not having custody but shall
keep the following record to identify all securities or funds held or obtained
relating to the inadvertent custody:
A ledger or other listing of all securities or funds held
or obtained, including the following information:
a. Issuer;
b. Type of security and series;
c. Date of issue;
d. For debt instruments, the denomination,
interest rate and maturity date;
e.
Certificate number, including alphabetical prefix or suffix;
f. Name in which registered;
g. Date given to the advisor;
h. Date sent to client or sender;
i. Form of delivery to client or sender, or
copy of the form of delivery to client or sender; and
j. Mail confirmation number, if applicable,
or confirmation by client or sender of the fund's or security's
return.
24. If an
investment advisor obtains possession of securities that are acquired from the
issuer in a transaction or chain of transactions not involving any public
offering that comply with the exception from custody under subdivision C 2 of
21VAC5-80-146,
the advisor shall keep the following records:
a. A record showing the issuer or current
transfer agent's name address, phone number, and other applicable contract
information pertaining to the party responsible for recording client interests
in the securities; and
b. A copy of
any legend, shareholder agreement, or other agreement showing that those
securities that are transferable only with prior consent of the issuer or
holders of the outstanding securities of the issuer.
25. Any records required pursuant to
21VAC5-80-260.
B.
1. If an investment advisor subject to
subsection A of this section has custody or possession of securities or funds
of any client, the records required to be made and kept under subsection A of
this section shall also include:
a. A journal
or other record showing all purchases, sales, receipts and deliveries of
securities (including certificate numbers) for such 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.
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.
e. A
copy of any records required to be made and kept under
21VAC5-80-146.
f. A copy of any and all documents executed
by the client (including a limited power of attorney) under which the advisor
is authorized or permitted to withdraw a client's funds or securities
maintained with a custodian upon the advisor's instruction to the
custodian.
g. A copy of each of the
client's quarterly account statements as generated and delivered by the
qualified custodian. If the advisor also generates a statement that is
delivered to the client, the advisor shall also maintain copies of such
statements along with the date such statements were sent to the
clients.
h. If applicable to the
advisor's situation, a copy of the special examination report verifying the
completion of the examination by an independent certified public accountant and
describing the nature and extent of the examination.
i. A record of any finding by the independent
certified public accountant of any material discrepancies found during the
examination.
j. If applicable,
evidence of the client's designation of an independent
representative.
2. If an
investment advisor has custody because it advises a pooled investment vehicle,
as defined in
21VAC5-80-146
A in the definition of custody in subdivision 1 c, the advisor shall also keep
the following records:
a. True, accurate, and
current account statements;
b.
Where the advisor complies with
21VAC5-80-146
C 4, the records required to be made and kept shall include:
(1) The date of the audit;
(2) A copy of the audited financial
statements; and
(3) Evidence of the
mailing of the audited financial to all limited partners, members, or other
beneficial owners within 120 days of the end of its fiscal year.
c. Where the advisor complies with
21VAC5-80-146
B 5, the records required to be made and kept shall include:
(1) A copy of the written agreement with the
independent party reviewing all fees and expenses, indicating the
responsibilities of the independent third party.
(2) Copies of all invoices and receipts
showing approval by the independent party for payment through the qualified
custodian.
E. Every
investment advisor subject to subsection A of this section shall preserve the
following records in the manner prescribed:
1.
All books and records required to be made under the provisions of subsection A
through subdivision C 1, inclusive, of this section, except for books and
records required to be made under the provisions of subdivisions A 11 and A 16
of this section, shall be maintained in an easily accessible place for a period
of not less than five years from the end of the fiscal year during which the
last entry was made on record, the first two years of which shall be maintained
in the principal office of the investment advisor.
2. Partnership articles and any amendments,
articles of incorporation, charters, minute books, and stock certificate books
of the investment advisor and of any predecessor, shall be maintained in the
principal office of the investment advisor and preserved until at least three
years after termination of the enterprise.
3. Books and records required to be made
under the provisions of subdivisions A 11 and A 16 of this section shall be
maintained in an easily accessible place for a period of not less than five
years, the first two years of which shall be maintained in the principal office
of the investment advisor, from the end of the fiscal year during which the
investment advisor last published or otherwise disseminated, directly or
indirectly, the notice, circular, advertisement, newspaper article, investment
letter, bulletin, or other communication including by electronic
media.
4. Books and records
required to be made under the provisions of subdivisions A 17 through A 22,
inclusive, of this section shall be maintained and preserved in an easily
accessible place for a period of not less than five years, from the end of the
fiscal year during which the last entry was made on such record, the first two
years in the principal office of the investment advisor, or for the time period
during which the investment advisor was registered or required to be registered
in the state, if less.
5.
Notwithstanding other record preservation requirements of this subsection, the
following records or copies shall be required to be maintained at the business
location of the investment advisor from which the customer or client is being
provided or has been provided with investment advisory services:
(i) records required to be preserved under
subdivisions A 3, A 7 through A 10, A 14 and A 15, A 17 through A 19,
subsections B and C and
(ii) the
records or copies required under the provision of subdivisions A 11 and A 16 of
this section which records or related records identify the name of the
investment advisor representative providing investment advice from that
business location, or which identify the business locations' physical address,
mailing address, electronic mailing address, or telephone number. The records
will be maintained for the period described in this
subsection.
F.
Every investment advisor shall establish and maintain a written disaster
recovery plan that shall address at a minimum:
1. The identity of individuals that will
conduct or wind down business on behalf of the investment advisor in the event
of death or incapacity of key persons;
2. Means to provide notification to clients
of the investment advisor and to those states in which the advisor is
registered of the death or incapacity of key persons;
a. Notification shall be provided to the
Division of Securities and Retail Franchising via IARD/CRD within 24 hours of
the death or incapacity of key persons.
b. Notification shall be given to clients
within five business days from the death or incapacity of key
persons.
3. Means for
clients' accounts to continue to be monitored until an orderly liquidation,
distribution or transfer of the clients' portfolio to another advisor can be
achieved or until an actual notice to the client of investment advisor death or
incapacity and client control of their assets occurs;
4. Means for the credit demands of the
investment advisor to be met; and
5. Data backups sufficient to allow rapid
resumption of the investment advisor's activities.
H.
1. The
records required to be maintained pursuant to this section may be immediately
produced or reproduced by photograph on film or, as provided in subdivision 2
of this subsection, on magnetic disk, tape or other computer storage medium,
and be maintained for the required time in that form. If records are preserved
or reproduced by photographic film or computer storage medium, the investment
advisor shall:
a. Arrange the records and
index the films or computer storage medium so as to permit the immediate
location of any particular record;
b. Be ready at all times to promptly provide
any facsimile enlargement of film or computer printout or copy of the computer
storage medium which the commission by its examiners or other representatives
may request;
c. Store separately
from the original one other copy of the film or computer storage medium for the
time required;
d. With respect to
records stored on computer storage medium, maintain procedures for maintenance
of, and access to, records so as to reasonably safeguard records from loss,
alteration, or destruction; and
e.
With respect to records stored on photographic film, at all times have
available, for the commission's examination of its records, facilities for
immediate, easily readable projection of the film and for producing easily
readable facsimile enlargements.
2. Pursuant to subdivision 1 of this
subsection, an advisor may maintain and preserve on computer tape or disk or
other computer storage medium records which, in the ordinary course of the
advisor's business, are created by the advisor on electronic media or are
received by the advisor solely on electronic media or by electronic
transmission.
Statutory Authority: §§
12.1-13
and
13.1-523 of the
Code of Virginia.
