Books and Records: Trade Affirmation, Allocations, and Confirmations

 

Books and Records: Trade Affirmation, Allocations, and Confirmations 

Contributed By - Thomas Yates

Managing Partner and Director

AdvisorAssist, LLC

                                                   

The U.S Securities and Exchange Commission’s (SEC) amendments to the record-keeping requirements, Rule 275.206(4)-2, for registered investment advisors, focuses on maintaining accurate and up-to-date records of allocations, confirmations, and affirmations related to securities transactions subject to Rule 15c6-2(a) as described in our initial AdvisorAssist Blog post. AdvisorAssist has been evaluating and monitoring industry guidance and best practices, regarding the amendment, since May 2023. During our evaluation, AdvisorAssist held discussions with each custodian and/or executing broker-dealer (herein “Custodian(s)”) to understand each Custodian’s process to assist RIAs in complying with this new rule, At this time, here is a summary of what RIAs are required to do: 

Books and Records Requirement 

Advisors are required to archive:

• Date and time stamp indicating when the trade allocation and trade affirmation occurred.
• Details, sent or received, about each:
• confirmation received,
• any allocation made, and
• each affirmation. 

The intention is to have accurate and current records for trades for securities transactions subject to Rule 15c6-2(a), as defined below. RIAs should validate and confirm that all email communications, platform instructions, or any other mode of communication related to client transactions is archived, and that RIAs are able to produce evidence of the communications and/or instructions upon request.

Transactions under Rule 15c6-2(a) are “All Securities”, with certain exemptions, as follows:

• Exempted Securities (e.g. Private Funds)
• Government Securities
• Municipal Securities
• Commercial Paper
• Bankers’ Acceptances
• Commercial Bills
• Security Based-Swaps

Settlement Cycle’s Impact on Process

The settlement cycle for transactions will now be reduced to one business day (T+1), which means all Custodians should be updating their process to adhere to the new settlement cycle requirement. Separately, a Custodian is mandated to maintain timestamped records of trade allocations, confirmations and affirmations, as described above. Due to this requirement placed on your Custodian, the information required for RIAs to archive should already be maintained on their respective platforms.

Furthermore, the SEC has provided commentary that RIAs may rely on third parties, e.g. Portfolio Management platforms, to maintain records on this. However, these third parties are not responsible for RIAs books and records, and while the data may exist, they can not assume responsibility on the RIA’s behalf for maintaining records. In addition, depending on the third party, data may only be readily available for a period of time that could impact the RIA’s ability to retrieve the requested data in a timely manner and may not allow for RIAs to comply with this rule.

How To Comply: Variations in Process Among Custodians

While AdvisorAssist remains in discussions with each Custodian, we also suggest that RIAs take the following steps to comply with this new rule:

• Reach out to their Custodians and ask them the following question: Can you provide instructions on how I can download a report, at least annually, date and time stamp of all trade allocations, confirmations and affirmations?
• Are bulk downloads available, and for what time period?
• Is batch reporting available?
• Is any level of automation available to our Firm for generating these items?
• Once these reports are received, save them into a dedicated folder where all books and records are kept, and ensure that this data is backed up!
• Use this opportunity to perform forensic testing for trade accuracy purposes, making sure trades were executed and/or allocated as intended.
• If any transaction activity is conducted via email, make sure that emails are archived and that email communications include any confirmations or additional transaction details sent by or received from custodians and/or broker-dealers. RIAs should separately log these communications so that they can ensure timely retrieval of these records upon request from a regulator.

As we continue discussions with Custodians, and have further guidance from the SEC, we will communicate this information out. Should you have any current questions or concerns, please reach out to your Consultant.

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