Investment Advisers Act of 1940 Rule 204(2)

Understanding the Investment Advisers Act Rule 204-2

Registered investment advisers (RIAs) face strict regulatory obligations under the Investment Advisers Act of 1940. Among its critical requirements, Rule 204-2, often referred to as the Books and Records Rule, plays a central role in ensuring transparency and accountability in advisory practices.

Below is what you need to know about the Books and Records Rule, and how it impacts RIAs.

What is the Investment Advisers Act Rule 204-2?

Rule 204-2 of the Investment Advisers Act of 1940 mandates that RIAs maintain and preserve accurate books and records if related to recommendations, advice, fund movements, order execution or performance. The rule outlines the types of records firms must retain and the specific format, retention period, and accessibility requirements. The goal of Rule 204-2 is to support regulatory oversight by ensuring advisory firms keep complete and verifiable records that demonstrate compliance, protect investors and enable firms to investigate if misconduct occurs.

Who does Rule 204-2 apply to?

Rule 204-2 applies to all registered investment advisers (RIAs) registered with the Securities and Exchange Commission (SEC) or with state securities regulators, depending on the size and scope of the firm. If your firm provides investment advice for compensation and meets the threshold for SEC or state registration, this rule governs your recordkeeping obligations — regardless of whether you’re a small independent adviser or part of a large financial institution.

Key provisions of Rule 204-2

RIAs must:

1. Create and retain specific categories of records, including trade blotters, client communications, advertising materials, performance records and internal memos
2. Maintain original and duplicate copies of required records for at least five years, with the first two years in an easily accessible location
3. Preserve electronic communications, such as emails, texts, social media posts, and chats, that relate to the firm’s advisory services
4. Store records in a manner that prevents unauthorized alteration, with secure, non-rewritable formats
5. Make records readily available for SEC examination or upon request

What are the penalties for violating Rule 204-2?

Failure to comply with Rule 204-2 can result in:

• Fines and monetary penalties
• SEC enforcement actions or administrative proceedings
• Suspension or revocation of adviser registration
• Reputational damage and loss of client trust

The SEC has demonstrated a growing willingness to pursue enforcement actions against firms that do not meet recordkeeping standards, particularly in relation to digital communications.

Best practices for RIA compliance with Rule 204-2

To stay compliant, RIAs should:

1. Implement a comprehensive communications retention policy covering digital channels permitted for use by employees for business purposes
2. Conduct regular audits of their recordkeeping practices and potential use of unapproved communications tools
3. Provide ongoing compliance training for employees and advisers
4. Ensure stored records are complete and accurate
5. Monitor electronic communications across email, mobile messaging, social media, and collaboration platforms for regulatory, legal and internal policy infractions

How Smarsh helps RIAs comply with Rule 204-2

Smarsh is the trusted partner of RIAs and financial services firms seeking robust, modern compliance solutions.

Our tools help you simplify and automate compliance with Rule 204-2 by:

• Capturing and archiving communications across 100+ channels including email, Microsoft Teams, WhatsApp, Slack, Zoom, social media, and more
• Offering WORM-based storage that meets SEC and FINRA standards
• Providing real-time supervision and alerts for risky or noncompliant behavior
• Enabling fast and efficient e-discovery with advanced search and retrieval tools
• Supporting audit readiness with detailed reporting and access controls

To learn more about modernizing your compliance strategy and adhering to Rule 204-2 — and other key regulations — contact us.