The Investment Advisers Act of 1940 Rule 204-2 enforces a significant regulatory obligation on all investment advisers registered with the Securities and Exchange Commission (SEC). This involves preserving books and records related to their investment advisory activities.
Under the Dodd-Frank Financial Reform Act, this rule now also applies to hedge funds and private equity firms.
What are the requirements of Rule 204-2?
Rule 204-2 mandates investment advisers to maintain books and records, including but not limited to:
- Communications, including electronic communications
- Orders
- Client agreements
It covers the preservation of off-channel electronic communications like email and text, permitting electronic recordkeeping with safeguards for data integrity and accessibility. Investment firms must also establish written supervisory procedures to prevent any violations.
Increasing Focus on Off Channel Communications
This rule requires investment advisers to securely store original copies of all communications, including those happening off-channel like personal texts/SMS, emails, WhatsApp, and similar digital platforms. Failure to comply with Rule 204-2 can result in enforcement actions, fines, and penalties.
Recent cases have resulted in advisers being faced to pay various penalties due to rule violations. The SEC has heightened its focus on off-channel communications within registered firms, emphasizing the importance of preserving all required records for strict adherence to the rule’s requirements.
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