Ariath glossary: Books and Records Rule
SEC Rule 204-2 under the Investment Advisers Act of 1940, which requires registered investment advisers to make and keep specified books and records relating to their advisory business.
In brief
- What it does
- Requires registered advisers to make and keep specified records of their advisory business.
- How it differs from an audit log
- The rule defines categories of business records. An audit log records system activity.
- What it needs in a wealth management firm
- A clear view of which records fall within the rule, how long they are kept, and how electronic copies are stored and retrieved.
How it works
How the books and records rule works
Rule 204-2 sets out what an adviser must make, keep and be able to produce:
Identify the required records
The rule lists categories of records, such as ledgers, order memoranda, certain written communications, advertisements and client agreements.
Make and keep them
Advisers must make and keep these records true, accurate and current.
Preserve them
Most records must be kept in an easily accessible place for not less than five years from the end of the fiscal year of the last entry, the first two years in an appropriate office of the adviser.
Produce them on request
Records must be readily available to SEC examiners, and electronic storage must be indexed, retrievable and safeguarded.
Some categories have different retention periods, so the rule text is the place to confirm the details.
The rule defines categories of records. Which of a firm's records fall within them is something the firm confirms with its compliance lead or counsel.
Comparison
Books and records vs. audit logs
The two are easy to confuse, and they serve different purposes.
Books and records
Business records that a registered adviser must make and keep under Rule 204-2.
For example
A written agreement with a client, or a copy of an advertisement the adviser disseminated.
Audit log
A time-stamped record of what happened in a system. It may help support a firm's recordkeeping, but the rule does not define it as a category.
For example
An entry showing who edited a client record, and when.
Whether a given log or record falls within Rule 204-2 depends on the facts and the firm. Confirm with your compliance lead or counsel.
In practice
Books and records categories in wealth management
These are examples of categories the rule lists. They are not a complete list, and they are not a statement of what any particular firm must keep.
Client agreements
Written agreements entered into with clients are among the listed categories.
Advertisements
A copy of each advertisement the adviser disseminates is a listed category.
Written communications
Certain written communications relating to recommendations and advice are listed.
Code of ethics records
The rule lists the code of ethics and related acknowledgments and reports.
Policies and procedures
The rule lists compliance policies and procedures and records of their annual review.
Firms assess how records created through technology, including AI-assisted work, fit into their own recordkeeping policies. Read the rule text and confirm the specifics with your compliance lead or counsel.
What it needs
What the rule asks of electronic recordkeeping
The rule permits electronic storage when its conditions are met. In summary, an adviser must:
- Arrange and index records so each can be located and retrieved
- Safeguard records from loss, alteration or destruction
- Limit access to authorized personnel and the SEC
- Provide records promptly when the SEC requests them
- Store a duplicate copy separately
- Keep records for the required period
This is a summary of the electronic storage conditions in the rule, not legal advice. Read the full text, and confirm how it applies to your firm with your compliance lead or counsel.
Common questions
Frequently asked questions about the books and records rule
Who does the rule apply to?
Rule 204-2 applies to investment advisers registered or required to be registered under section 203 of the Investment Advisers Act of 1940.
How long must records be kept?
Most records must be kept for not less than five years from the end of the fiscal year during which the last entry was made, the first two years in an appropriate office of the adviser. Some categories have different periods, so read the rule text.
Can records be stored electronically?
The rule permits electronic storage media when its conditions are met, such as indexing records for retrieval, safeguarding them from loss or alteration, and limiting access to authorized personnel.
This entry is educational. It is not legal or compliance advice and does not guarantee regulatory compliance. Confirm the requirements that apply to your firm with your compliance lead or counsel.
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