November 4, 2014

CCO Series: Top 12 Regulatory Deficiencies for RIAs -- #1: Books & Records

What You Need to Know

The most common compliance deficiency for RIA firms (impacting roughly 68% of firms) is insufficient maintenance of books and records. Under the “Books and Records Rule” there are several things that must be kept which generally fall into the following categories: Compliance Program, Client Management, Trading, Marketing, and Business Management. For the most part, these must be maintained by all advisors, but there are some requirements that depend on individual business practices, such as soft dollar usage, proxy voting, custody, use of solicitors.

For a detailed look at Books & Records requirements please click here.

For the most part, these records must be kept for a minimum of five years, the first two of which must be “readily accessible” to the advisor. Cloud storage, for example is readily accessible from the advisor’s office. Off site hard copies stored at a facility like Iron Mountain, is not. For the sake of business continuity, it is also important to keep backups of these documents off site in the event of an unexpected disaster.

Why You Should Care

Ensuring that your books and records are in order can be beneficial on several levels. Accurate books and records can validate your firm’s adherence to its fiduciary duty, support the decisions you have made on behalf of your clients, and substantiate your firm’s finances. Considering the fact that state regulators have made a point of ramping up “books and records” examinations and that they are obligated to pursue every complaint received against an advisor, diligent upkeep allows for efficient, swift resolution to future questions.

It should also be kept in mind that these requirements are in place to protect clients from fraudulent management of their assets, which can also provide protection from unwarranted scrutiny for responsibly managed firms. Highlighting this connection between compliance responsibilities and client protection has been a huge missed opportunity for RIAs historically.

Our Recommendations

To ensure that your firm is keeping up with regulatory requirements and industry best practices in this area:
  • Maintain an inventory list that includes any potential requirements, and conduct periodic reviews of your books and records to ensure adherence to the proper regulations.
  • Rather than viewing this regulation as a hassle, it is important to focus on the long term benefits of incorporating these responsibilities into the everyday activities of the firm. Leveraging tools such as a CRM, for example, can instill confident that things are being archived and maintained in an efficient manner.
  • Remain mindful of regulatory “hot spots” that can change over time. These currently include: advertising, email/social media archiving, cybersecurity, and documented investment decision making.
  • Conduct annual due diligence on cloud storage vendors to ensure that they have appropriate physical, electronic and procedural safeguards in place to secure your data.

AdvisorAssist’s CCO Series: Top 12 Regulatory Deficiencies for RIAs is a series of articles that will help your firm understand and avoid the most common compliance deficiencies found by regulators. Our goal is to help you increase your confidence that your firm remains “exam ready.” Click here to read more posts from our CCO Series: Top 12 Regulatory Deficiencies for RIAs. We would welcome the chance to learn more about you and your firm. Click here to request an introductory call from one of our consultants.


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