North Carolina Administrative Code › Title 18 - SECRETARY OF STATE › Chapter 06 - SECURITIES DIVISION › Subchapter A - RECODIFIED RULES › Section .1700 - REGISTRATION OF INVESTMENT ADVISERS AND INVESTMENT ADVISER REPRESENTATIVES › Section 06A .1706 - RECORD KEEPING REQUIREMENTS FOR INVESTMENT ADVISERS

Current through Register Vol. 39, No. 2, July 15, 2024
(a) Except as otherwise provided in Paragraph
				  (j) of this Rule, every investment adviser registered or required to be
				  registered under the Act shall make and keep true, accurate and current the
				  following books, ledgers and records:
(1) A
				  journal or journals, including cash receipts and disbursements records, and any
				  other records of original entry forming the basis of entries in any
				  ledger;
(2) General and auxiliary
				  ledgers (or other comparable records) reflecting asset, liability, reserve,
				  capital, income and expense accounts;
(3) A memorandum of each order given by the
				  investment adviser for the purchase or sale of any security, of any instruction
				  received by the investment adviser from the client concerning the purchase,
				  sale, receipt or delivery of a particular security, and of any modification or
				  cancellation of any such order or instruction. Such memoranda shall show the
				  terms and conditions of the order, instruction, modification or cancellation;
				  shall identify the person connected with the investment adviser who recommended
				  the transaction to the client and the person who placed such order; and shall
				  show the account for which entered, the date of entry, and the bank or dealer
				  by or through whom executed where appropriate. Orders entered pursuant to the
				  exercise of discretionary power shall be so designated;
(4) All check books, bank statements,
				  canceled checks and cash reconciliations of the investment adviser;
(5) All bills or statements (or copies
				  thereof), paid or unpaid, relating to the business of the investment adviser as
				  such;
(6) All trial balances,
				  financial statements, and internal audit working papers relating to the
				  business of such investment adviser;
(7) Originals of all written communications
				  received and copies of all written communications sent by such investment
				  adviser relating to:
(A) Any recommendation
				  made or proposed to be made and any advice given or proposed to be
				  given,
(B) Any receipt,
				  disbursement or delivery of funds or securities, or
(C) The placing or execution of any order to
				  purchase or sell any security; provided, however,
(i) that the investment adviser shall not be
				  required to keep any unsolicited market letters and other similar
				  communications of general public distribution not prepared by or for the
				  investment adviser, and
(ii) that
				  if the investment adviser sends any notice, circular or other advertisement
				  offering any report, analysis, publication or other investment advisory service
				  to more than ten persons, the investment adviser shall not be required to keep
				  a record of the names and addresses of the persons to whom it was sent; except
				  that if such notice, circular or advertisement is distributed to persons named
				  on any list, the investment adviser shall retain with the copy of such notice,
				  circular or advertisement a memorandum describing the list and the source
				  thereof;
(8)
				  A list or other record of all accounts in which the investment adviser is
				  vested with any discretionary power with respect to the funds, securities or
				  transactions of any client;
(9) All
				  powers of attorney and other evidences of the granting of any discretionary
				  authority by any client to the investment adviser, or copies thereof;
(10) All written agreements (or copies
				  thereof) entered into by the investment adviser with any client or otherwise
				  relating to the business of such investment adviser as such;
(11) A copy of each notice, circular,
				  advertisement, newspaper article, investment letter, bulletin or other
				  communication recommending the purchase or sale of a specific security, which
				  the investment adviser circulates or distributes, directly or indirectly, to
				  ten or more persons (other than clients receiving investment supervisory
				  services or persons connected with such investment adviser), and if such
				  notice, circular, advertisement, newspaper article, investment letter, bulletin
				  or other communication does not state the reasons for such recommendation, a
				  memorandum of the investment adviser indicating the reasons thereof;
(12) The following records:
(A) A record of every transaction in a
				  security in which the investment adviser or any advisory representative of such
				  investment adviser has, or by reason of such transaction acquires, any direct
				  or indirect beneficial ownership, except:
(i)
				  Transactions effected in any account over which neither the investment adviser
				  nor any advisory representative of the investment adviser has any direct or
				  indirect influence or control; and
(ii) Transactions in securities which are
				  direct obligations of the United States
Such record shall state the title and amount of the
					 security involved; the date and nature of the transaction (i.e., purchase, sale
					 or other acquisition or disposition); the price at which it was effected; and
					 the name of the dealer or bank with or through whom the transaction was
					 effected.
Such record may also contain a statement declaring that the
					 reporting or recording of any such transaction shall not be construed as an
					 admission that the investment adviser or advisory representative has any direct
					 or indirect beneficial ownership in the security. A transaction shall be
					 recorded not later than 10 days after the end of the calendar quarter in which
					 the transaction was effected.
(B) For purposes of this Subparagraph
				  (a)(12), the term "advisory representative" shall mean any partner, officer or
				  director of the investment adviser; any employee who makes any recommendation,
				  who participates in the determination of which recommendation shall be made, or
				  whose functions or duties relate to the determination of which recommendation
				  shall be made; any employee who, in connection with his duties (other than
				  clerical, ministerial or administrative duties), obtains any information
				  concerning which securities are being recommended prior to the effective
				  dissemination of such recommendations or of the information concerning such
				  recommendations; and any of the following persons who obtain information
				  concerning securities recommendations being made by such investment adviser
				  prior to the effective dissemination of such recommendations or of the
				  information concerning such recommendations:
(i) any person in a control relationship to
				  the investment adviser,
(ii) any
				  affiliated person of such controlling person, and
(iii) any affiliated person of such
				  affiliated person.
"Control" shall have the same meaning as that set forth in
					 Section 2(a)(9) of the Investment Company Act of 1940, as amended.
(C) An investment
				  adviser shall not be deemed to have violated the provisions of this
				  Subparagraph (a)(12) because of his failure to record securities transactions
				  of any advisory representative if he establishes that he instituted adequate
				  procedures and used reasonable diligence to obtain promptly reports of all
				  transactions required to be recorded;
(13) Records required of investment advisers
				  primarily engaged in other businesses:
(A)
				  Notwithstanding the provisions of Subparagraph (a)(12) in this Rule, where the
				  investment adviser is primarily engaged in a business or businesses other than
				  advising registered investment companies or other advisory clients, a record
				  must be maintained of every transaction in a security in which the investment
				  adviser or any advisory representative of such investment adviser has, or by
				  reason of such transaction acquires, any direct or indirect beneficial
				  ownership, except:
(i) Transactions effected
				  in any account over which neither the investment adviser nor any advisory
				  representative of the investment adviser has any direct or indirect influence
				  or control; and
(ii) Transactions
				  in securities which are direct obligations of the United States
Such record shall state the title and amount of the
					 security involved; the date and nature of the transaction (i.e., purchase, sale
					 or other acquisition or disposition); the price at which it was effected; and
					 the name of the dealer or bank with or through whom the transaction was
					 effected. Such record may also contain a statement declaring that the reporting
					 or recording of any such transaction shall not be construed as an admission
					 that the investment adviser or advisory representative has any direct or
					 indirect beneficial ownership in the security. A transaction shall be recorded
					 not later than 10 days after the end of the calendar quarter in which the
					 transaction was effected.
(B) An investment adviser is "primarily
				  engaged in a business or businesses other than advising registered investment
				  companies or other advisory clients" when, for each of its three most recent
				  fiscal years or for the period of time since organization, whichever is lesser,
				  the investment adviser derived, on an unconsolidated basis, more than 50
				  percent of:
(i) its total sales and revenues;
				  and
(ii) its income (or loss)
				  before income taxes and extraordinary items;
from such other business or businesses.
(C) For purposes of this
				  Subparagraph (13), the term "advisory representative", when used in connection
				  with a company primarily engaged in a business or businesses other than
				  advising registered investment companies or other advisory clients, shall mean
				  any partner, officer, director or employee of the investment adviser who makes
				  any recommendation, who participates in the determination of which
				  recommendation shall be made, or whose functions or duties relate to the
				  determination of which recommendation shall be made, or who, in connection with
				  his duties (other than clerical, ministerial or administrative duties), obtains
				  any information concerning which securities are being recommended prior to the
				  effective dissemination of such recommendations or of the information
				  concerning such recommendations; and any of the following persons who obtain
				  information concerning securities recommendations being made by such investment
				  adviser prior to the effective dissemination of such recommendations or of the
				  information concerning such recommendations:
(i) any person in a control relationship to
				  the investment adviser,
(ii) any
				  affiliated person of such controlling person, and
(iii) any affiliated person of such
				  affiliated person.
"Control" shall have the same meaning as that set forth in
					 Section 2(a)(9) of the Investment Company Act of 1940, as amended (see
					 G.S.
					 78A-2(10)).
(D) An investment
				  adviser shall not be deemed to have violated the provisions of this
				  Subparagraph (13) because of his failure to record securities transactions of
				  any advisory representative if he establishes that he instituted adequate
				  procedures and used reasonable diligence to obtain promptly reports of all
				  transactions required to be recorded;
(14) A copy of the following:
(A) A copy of each written statement and each
				  amendment or revision thereof, given or sent to any client or prospective
				  client of such investment adviser in accordance with the provisions of Rule
				  .1707;
(B) any summary of material
				  changes that is required by Part 2 of Form ADV but is not contained in the
				  written statement; and
(C) a record
				  of the dates that each written statement, and each amendment or revision
				  thereof, was given, or offered to be given, to any client or prospective client
				  who subsequently becomes a client.
(15) A memorandum describing any legal or
				  disciplinary event listed in Schedule D of Form ADV or in any Form U-4 relating
				  to any of the investment adviser's investment adviser representatives and
				  presumed to be material, if the event involved the investment adviser or any of
				  its investment adviser representatives or supervised persons and is not
				  disclosed in the written statements described in Paragraph (a)(14)(A) of this
				  Section. The memorandum must explain the investment adviser's determination
				  that the presumption of materiality is overcome, and must discuss the factors
				  described in those items.
(16) For
				  each client that was obtained by the adviser by means of a solicitor to whom a
				  cash fee was paid by the adviser:
(A)
				  evidence of a written agreement to which the adviser is a party related to the
				  payment of such fee;
(B) a signed
				  and dated acknowledgement of receipt from the client evidencing the client's
				  receipt of the investment adviser's disclosure statement and a written
				  disclosure statement of the solicitor; and
(C) a copy of the solicitor's written
				  disclosure statement.
The written agreement, acknowledgment and solicitor
					 disclosure statement will be considered to be in compliance with Rule .1717.
					 For purposes of this Rule, the term "solicitor" shall mean any person or entity
					 who, for compensation, acts as an agent of an investment adviser in referring
					 potential clients.
(17) Copies, with original signatures of the
				  investment adviser's appropriate signatory and the investment adviser
				  representative, of each initial Form U-4 and each amendment to Disclosure
				  Reporting Pages (DRPs U-4) must be retained by the investment adviser (filing
				  on behalf of the investment adviser representative) and must be made available
				  for inspection upon regulatory request.