If there was ever a reason to follow Josh’s advice to involve compliance early in building out the functionality of your robo-adviser, the recordkeeping requirements of the Advisers Act are it.  As Josh mentioned in his post, Advisers Act Rule 204-2 imposes extensive recordkeeping requirements that you’ll want to be familiar with from the start.  Let’s talk about why that is.

First, while we generally don’t want to steer you away from this blog, I will, this one time, invite you to click here to take a glance at the enormity of Rule 204-2.  It’s massive.  As you can see, the rule requires advisers to keep a laundry list of records relating to internal and client-facing operations.  Mandatory books and records include journals, ledgers, transaction orders, bills, financial statements, trade tickets, client agreements, charter documents, advertisements, disclosures, client communications, political contribution records, performance calculations, and many others.  Due to the sheer number of types of records required, you’ll want to design your systems and procedures to automate the capture and retention of records as much as possible.  And if you need it, many vendors offer software solutions to assist you in getting this done.

Second, it’s not just the number and types of records you should be concerned about.  Rule 204-2 also imposes specific requirements on how long and in what form those records must be maintained.  Most records relating to a firm’s operations must be kept for a total of five years (the first two years accessible from the adviser’s office), with an exception for certain charter documents that must be kept for at least three years after the firm ceases operations.  As to format, while paper is acceptable, most robo-advisers will want to store records electronically.  If you do so, be sure that you:

  • safeguard records from loss, alteration and destruction;
  • limit access to properly authorized persons;
  • ensure that reproductions of non-electronic documents are complete, true and legible; and
  • store records in a way that allows them to be easily located, accessed and retrieved.

Finally, you should design your recordkeeping processes to ensure that records are maintained on a current basis.  What counts as “current” depends on the nature of records being kept.  For example, the SEC expects primary records of transactions (like invoices, logs, and trade confirmations) to be created concurrently with the transaction or immediately thereafter.  Doing so helps ensure accuracy.  By contrast, posting information to secondary records (like internal ledgers) can be done as frequently as the business requires and is practicable for the number of staff available.

As you can see, a robo-adviser’s recordkeeping responsibilities are substantial.  However, to the extent you’re able to automate this function from the outset, you’ll be able to focus more on other (and more fun) aspects of your business.  Of course, some human intervention will always be needed, as some records may not be suitable for automation.  Moreover, as we will discuss in a future post, you will need to periodically test the effectiveness of your policies and procedures.  But whatever mix of human and automation you settle on, putting robust procedures in place will help you meet your fiduciary responsibilities to clients and prepare you for the recordkeeping portion of your next SEC exam.

That’s all for this week (and for 2020).  We hope you’ll join us in the new year, when Josh will discuss a perennial hot topic for the SEC, valuation and fee assessment.  Stay well!

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