Virginia Administrative Code › Title 21 - SECURITIES AND RETAIL FRANCHISING › Agency 5 - STATE CORPORATION COMMISSION › Chapter 80 - INVESTMENT ADVISORS › Part III - Investment Advisor, Federal Covered Advisor, and Investment Advisor Representative Regulations › Section 21VAC5-80-160 - Recordkeeping requirements for investment advisors

Current through Register Vol. 40, No. 24, July 15, 2024
A. Every investment advisor registered or
				  required to be registered under the Act shall make and keep true, accurate and
				  current the following books, ledgers and records, except an investment advisor
				  having its principal place of business outside this Commonwealth and registered
				  or licensed, and in compliance with the applicable books and records
				  requirements, in the state where its principal place of business is located,
				  shall only be required to make, keep current, maintain and preserve such of the
				  following required books, ledgers and records as are not in addition to those
				  required under the laws of the state in which it maintains its principal place
				  of business:
1. A journal, 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 advisor for the purchase or sale of any
				  security, of any instruction received by the investment advisor 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. The
				  memoranda shall show the terms and conditions of the order, instruction,
				  modification or cancellation; shall identify the person connected with the
				  investment advisor who recommended the transaction to the client and the person
				  who placed the order; and shall show the account for which entered, the date of
				  entry, and the bank, broker 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 advisor.
5. All bills or
				  statements (or copies of), paid or unpaid, relating to the business as an
				  investment advisor.
6. All trial
				  balances, financial statements prepared in accordance with generally accepted
				  accounting principles which shall include a balance sheet, income statement and
				  such other statements as may be required pursuant to
				  21VAC5-80-180,
				  and internal audit working papers relating to the investment advisor's business
				  as an investment advisor.
7.
				  Originals of all written communications received and copies of all written
				  communications sent by the investment advisor relating to (i) any
				  recommendation made or proposed to be made and any advice given or proposed to
				  be given; (ii) any receipt, disbursement or delivery of funds or securities;
				  and (iii) the placing or execution of any order to purchase or sell any
				  security; however, (a) the investment advisor 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 advisor, and (b) if the
				  investment advisor sends any notice, circular or other advertisement offering
				  any report, analysis, publication or other investment advisory service to more
				  than 10 persons, the investment advisor shall not be required to keep a record
				  of the names and addresses of the persons to whom it was sent; except that if
				  the notice, circular or advertisement is distributed to persons named on any
				  list, the investment advisor shall retain with a copy of the notice, circular
				  or advertisement a memorandum describing the list and the source
				  thereof.
8. A list or other record
				  of all accounts which list identifies the accounts in which the investment
				  advisor 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
				  advisor, or copies thereof.
10. All
				  written agreements (or copies thereof) entered into by the investment advisor
				  with any client, and all other written agreements otherwise related to the
				  investment advisor's business as an investment advisor.
11. A file containing a copy of each notice,
				  circular, advertisement, newspaper article, investment letter, bulletin, or
				  other communication including by electronic media that the investment advisor
				  circulates or distributes, directly or indirectly, to two or more persons
				  (other than persons connected with the investment advisor), and if the notice,
				  circular, advertisement, newspaper article, investment letter, bulletin, or
				  other communication including by electronic media recommends the purchase or
				  sale of a specific security and does not state the reasons for the
				  recommendation, a memorandum of the investment adviser indicating the reasons
				  for the recommendation.
12.
a.
A record of every transaction in a security in which the
					 investment advisor or any investment advisory representative of the investment
					 advisor has, or by reason of any transaction acquires, any direct or indirect
					 beneficial ownership, except (i) transactions effected in any account over
					 which neither the investment advisor nor any investment advisory representative
					 of the investment advisor has any direct or indirect influence or control; and
					 (ii) transactions in securities which are direct obligations of the United
					 States. The 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 broker, dealer or bank with or through whom the transaction was
					 effected. The 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 advisor or investment 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 subdivision 12, the
				  following definitions will apply. The term "advisory representative" means any
				  partner, officer or director of the investment advisor; any employee who
				  participates in any way in the determination of which recommendations shall be
				  made; any employee who, in connection with his duties, obtains any information
				  concerning which securities are being recommended prior to the effective
				  dissemination of the recommendations; and any of the following persons who
				  obtain information concerning securities recommendations being made by the
				  investment advisor prior to the effective dissemination of the recommendations:
(1) Any person in a control relationship to
				  the investment adviser;
(2) Any
				  affiliated person of a controlling person; and
(3) Any affiliated person of an affiliated
				  person.
"Control" means the power to exercise a controlling
					 influence over the management or policies of a company, unless such power is
					 solely the result of an official position with the company. Any person who owns
					 beneficially, either directly or through one or more controlled companies, more
					 than 25% of the ownership interest of a company shall be presumed to control
					 the company.
c. An
				  investment advisor shall not be deemed to have violated the provisions of this
				  subdivision 12 because of his failure to record securities transactions of any
				  investment advisor representative if the investment advisor establishes that it
				  instituted adequate procedures and used reasonable diligence to obtain promptly
				  reports of all transactions required to be recorded.
13.
a.
Notwithstanding the provisions of subdivision 12 of this
					 subsection, where the investment advisor is primarily engaged in a business
					 other than advising investment advisory clients, a record must be maintained of
					 every transaction in a security in which the investment advisor or any
					 investment advisory representative of such investment advisor 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 advisor nor any investment advisory representative of the investment
					 advisor has any direct or indirect influence or control; and (ii) transactions
					 in securities which are direct obligations of the United States. The 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 broker, dealer or bank
					 with or through whom the transaction was effected. The 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 advisor or
					 investment 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
				  advisor is "primarily engaged in a business other than advising investment
				  advisory clients" when, for each of its most recent three fiscal years or for
				  the period of time since organization, whichever is less, the investment
				  advisor derived, on an unconsolidated basis, more than 50% of (i) its total
				  sales and revenues, and (ii) its income (or loss) before income taxes and
				  extraordinary items, from such other business.
c. For purposes of this subdivision 13, the
				  following definitions will apply. The term "advisory representative," when used
				  in connection with a company primarily engaged in a business other than
				  advising investment advisory clients, means any partner, officer, director or
				  employee of the investment advisor who participates in any way in the
				  determination of which recommendation shall be made, or whose functions or
				  duties relate to the determination of which securities are being recommended
				  prior to the effective dissemination of the recommendations; and any of the
				  following persons, who obtain information concerning securities recommendations
				  being made by the investment advisor prior to the effective dissemination of
				  the recommendations or of the information concerning the recommendations:
(1) Any person in a control relationship to
				  the investment advisor;
(2) Any
				  affiliated person of a controlling person; and
(3) Any affiliated person of an affiliated
				  person.
d. An investment
				  advisor shall not be deemed to have violated the provisions of this subdivision
				  13 because of his failure to record securities transactions of any investment
				  advisor 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 each written statement and each
				  amendment or revision, given or sent to any client or prospective client of
				  such investment advisor in accordance with the provisions of
				  21VAC5-80-190
				  and a record of the dates that each written statement, and each amendment or
				  revision, was given, or offered to be given, to any client or prospective
				  client who subsequently becomes a client.
15. For each client that was obtained by the
				  advisor by means of a solicitor to whom a cash fee was paid by the advisor, the
				  following:
a. Evidence of a written agreement
				  to which the advisor 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
				  advisor'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,
				  acknowledgement and solicitor disclosure statement will be considered to be in
				  compliance if such documents are in compliance with Rule 275.206(4)-3 of the
				  Investment Advisers Act of 1940.
For purposes of this regulation, the term "solicitor" means
					 any person or entity who, for compensation, acts as an agent of an investment
					 advisor in referring potential clients.
16. All accounts, books, internal working
				  papers, and any other records or documents that are necessary to form the basis
				  for or demonstrate the calculation of the performance or rate of return of all
				  managed accounts or securities recommendations in any notice, circular,
				  advertisement, newspaper article, investment letter, bulletin, or other
				  communication including electronic media that the investment advisor circulates
				  or distributes directly or indirectly, to two or more persons (other than
				  persons connected with the investment advisor); however, with respect to the
				  performance of managed accounts, the retention of all account statements, if
				  they reflect all debits, credits, and other transactions in a client's account
				  for the period of the statement, and all worksheets necessary to demonstrate
				  the calculation of the performance or rate of return of all managed accounts
				  shall be deemed to satisfy the requirements of this subdivision.
17. A file containing a copy of all written
				  communications received or sent regarding any litigation involving the
				  investment advisor or any investment advisor representative or employee, and
				  regarding any written customer or client complaint.
18. Written information about each investment
				  advisory client that is the basis for making any recommendation or providing
				  any investment advice to the client.
19. Written procedures to supervise the
				  activities of employees and investment advisor representatives that are
				  reasonably designed to achieve compliance with applicable securities laws and
				  regulations.
20. A file containing
				  a copy of each document (other than any notices of general dissemination) that
				  was filed with or received from any state or federal agency or self regulatory
				  organization and that pertains to the registrant or its investment advisor
				  representatives, which file should contain, but is not limited to, all
				  applications, amendments, renewal filings, and correspondence.
21. Any records documenting dates, locations
				  and findings of the investment advisor's annual review of these policies and
				  procedures conducted pursuant to subdivision F of
				  21VAC5-80-170.
22. Copies, with original signatures of the
				  investment advisor's appropriate signatory and the investment advisor
				  representative, of each initial Form U4 and each amendment to Disclosure
				  Reporting Pages (DRPs U4) must be retained by the investment advisor (filing on
				  behalf of the investment advisor representative) and must be made available for
				  inspection upon regulatory request.
23. Where the advisor inadvertently held or
				  obtained a client's securities or funds and returned them to the client within
				  three business days or has forwarded third party checks within three business
				  days of receipt, the advisor will be considered as not having custody but shall
				  keep the following record to identify all securities or funds held or obtained
				  relating to the inadvertent custody:
A ledger or other listing of all securities or funds held
					 or obtained, including the following information:
a. Issuer;
b. Type of security and series;
c. Date of issue;
d. For debt instruments, the denomination,
				  interest rate and maturity date;
e.
				  Certificate number, including alphabetical prefix or suffix;
f. Name in which registered;
g. Date given to the advisor;
h. Date sent to client or sender;
i. Form of delivery to client or sender, or
				  copy of the form of delivery to client or sender; and
j. Mail confirmation number, if applicable,
				  or confirmation by client or sender of the fund's or security's
				  return.
24. If an
				  investment advisor obtains possession of securities that are acquired from the
				  issuer in a transaction or chain of transactions not involving any public
				  offering that comply with the exception from custody under subdivision C 2 of
				  21VAC5-80-146,
				  the advisor shall keep the following records:
a. A record showing the issuer or current
				  transfer agent's name address, phone number, and other applicable contract
				  information pertaining to the party responsible for recording client interests
				  in the securities; and
b. A copy of
				  any legend, shareholder agreement, or other agreement showing that those
				  securities that are transferable only with prior consent of the issuer or
				  holders of the outstanding securities of the issuer.
25. Any records required pursuant to
				  21VAC5-80-260.