Registrations of Persons - Investment Advisers: Ongoing Requirements

Investment advisers must create and maintain all records (including books, marketing and correspondence) for a minimum of five years.

Record-Keeping: The following is a quote from a NASAA Model Rule adopted in 2003:

Every investment adviser subject to subsection (a) of this rule shall preserve the following records in the manner prescribed:

1. All books and records required to be made under the provisions of paragraph (a) to (c)(1), inclusive, of this Rule (except for books and records required to be made under the provisions of paragraphs (a)(11) and (a)(16) of this Rule), 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 record, the first two years in the principal office of the investment adviser.

 

Exam Tips and Tricks!
Memorize the fact that the number of years required for recordkeeping is a MINIMUM of FIVE YEARS. It is highly likely you will be tested on this concept on your upcoming exam.

Investment Advisers: Books and Records
The books, records and financial reporting requirements of broker-dealers are governed by the SEC and the self-regulatory organizations (SRO), such as the exchanges and FINRA.

Federal law: the Securities and Exchange Act of 1934 prohibits states from imposing requirements on broker-dealers that are more extensive or burdensome. The Section of the '34 Act that spells this out is Section 15(h), which, in part, says:

"No law, rule, regulation, or order, or other administrative action of any state or political subdivisionthereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this title."

The Official Comments that accompany the 2002 USA echo the Federal Law:

"... Under the National Securities Markets Improvement Act of 1996, States may not impose such requirements on covered broker-dealers and investment advisers greater than those specified in Section 15(h) of the Securities Exchange Act of 1934 and Section 222 of the Investment Advisers Act of 1940.

If, on the Series 63 exam, you see a reference to Section 15(h) just remember that the states cannot impose requirements on broker-dealers that are more difficult or extensive than those already mandated by the SEC.

The records of a broker-dealer's business must be maintained, by SEC Rule, for three years. The records that a broker-dealer maintains for its customer accounts must generally be maintained for six years.

Those investment advisers that are covered by the USA (not federal covered) are required to maintain records for five years by the Model Rules of NASAA that we mentioned earlier. The general requirement is:

"...All books and records required to be made under the provisions o f... this rule ... 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 record, the first two years in the principal office of the investment adviser."

The SEC's specific requirements for a broker-dealer's minimum net capital depend on the nature of the firm's business and are beyond the scope of the Series 63. Just be aware that the financial stability requirements for broker-dealers are governed by SEC rules and that under federal law the states cannot impose more stringent requirements. Here again, Section 15(h) applies.
 

Exam Tips and Tricks
You will probably NOT see a question regarding financial reporting on the test as applied to investment advisers and broker-dealers because such requirements can easily differ from state to state. However if you do, it is wise to remember that a state cannot require an investment adviser or broker-dealer to report MORE FREQUENTLY than quarterly, though in most cases annual reporting is the norm!

Sarbanes-Oxley Act (SOA)
In July 2002, the Sarbanes-Oxley Act (SOA) introduced major changes to the regulation of corporate governance and financial practice. The act is named after its main architects, Senator Paul Sarbanes and Representative Michael Oxley.

  • The act really only affects corporate financial reporting, but will (in time) trickle through to the USA, and no doubt trigger some changes as well.
     
  • Though the SOA really only affected the USA in one way, you will still find a link to the act in the resources section of the study guide, should you want to read about it.
     
  • How did the SOA affect the USA? The federal statute of limitations for criminal charges was changed from two years to five years.
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