§ 304.012. Investment adviser required records.
(a) Except as provided in subsection (j), every investment adviser registered under the act shall make and keep true, accurate and current all of 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 the order or instruction. The memorandum must:
(i) Show the terms and conditions of the order, instruction, modification or cancellation.
(ii) Identify the person connected with the investment adviser who recommended the transaction to the client and the person who placed the order.
(iii) Show the account for which entered, the date of entry and the bank, broker-dealer by or through whom executed, if appropriate.
(iv) Designate orders entered under the exercise of discretionary power.
(4) Check books, bank statements, canceled checks and cash reconciliations of the investment adviser.
(5) Bills or statements (or copies of), paid or unpaid, relating to the investment adviser’s business as an investment adviser.
(6) Trial balances, financial statements, net worth computation and internal audit working papers relating to the investment adviser’s business as an investment adviser.
(7) Originals of written communications received and copies of written communications sent by the investment adviser relating to one or more of the following:
(i) A recommendation made or proposed to be made and any advice given or proposed to be given.
(ii) A receipt, disbursement or delivery of funds or securities.
(iii) The placing or execution of an order to purchase or sell any security, except that an investment adviser:
(A) Is not required to keep any unsolicited market letters and other similar communications of general public distribution not prepared by or for the investment adviser.
(B) With respect to a notice, circular or other advertisement offering any report, analysis, publication or other investment advisory service sent by the investment adviser to more than ten persons (including transmission by electronic means), the following apply:
(I) The investment adviser is not required to keep a record of the names and addresses of the persons to whom it was sent.
(II) If the notice, circular or advertisement is distributed to persons named on any list, the investment adviser shall retain with the copy of the notice, circular or advertisement a memorandum describing the list and its source.
(8) A list or other record of all accounts which list identifies the accounts in which the investment adviser is vested with any discretionary power with respect to the funds, securities or transactions of any client.
(9) A copy of all powers of attorney and other evidences of the granting of any discretionary authority by any client to the investment adviser.
(10) A copy in writing of each agreement entered into by the investment adviser with a client, and all other written agreements otherwise relating to the investment adviser’s business as an investment adviser.
(11) A file containing:
(i) A copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication including by electronic media that the investment adviser circulates or distributes, directly or indirectly, to two or more persons, other than persons connected with the investment adviser.
(ii) A memorandum of the investment adviser indicating the reasons for the recommendation 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.
(12) Records of transactions as follows:
(i) A record of every transaction in a security in which the investment adviser or investment adviser representative of the investment adviser has, or by reason of any transaction acquires, any direct or indirect beneficial ownership except:
(A) Transactions effected in any account over which the investment adviser or an investment adviser representative of the investment adviser does not have direct or indirect influence or control.
(B) Transactions in securities which are direct obligations of the United States. The record must state:
(I) The title and amount of the security involved, and the date and nature of the transaction (that is, purchase, sale or other acquisition or disposition).
(II) The price at which it was effected.
(III) The name of the broker-dealer or bank with or through whom the transaction was effected.
(ii) The record may also contain a statement declaring that the reporting or recording of any transaction will not be construed as an admission that the investment adviser or investment adviser representative has any direct or indirect beneficial ownership in the security.
(iii) A transaction shall be recorded not later than 10 days after the end of the calendar quarter in which the transaction was effected.
(iv) An investment adviser shall implement adequate procedures and use reasonable diligence to obtain promptly reports of all transactions required to be recorded.
(13) Records of transactions by investment advisers primarily engaged in a business other than advising clients as follows:
(i) Notwithstanding paragraph (12), if the investment adviser is primarily engaged in a business or businesses other than advising investment advisory clients, a record shall be maintained of every transaction in a security in which the investment adviser or any investment adviser representative of the investment adviser has, or by reason of any transaction acquires, any direct or indirect beneficial ownership, except transactions:
(A) Effected in an account over which the investment adviser or an investment adviser representative of the investment adviser does not have direct or indirect influence or control.
(B) In securities which are direct obligations of the United States. The record must state:
(I) The title and amount of the security involved.
(II) The date and nature of the transaction (that is, purchase, sale, or other acquisition or disposition).
(III) The price at which it was effected, and the name of the broker-dealer or bank with or through whom the transaction was effected.
(ii) The record may also contain a statement declaring that the reporting or recording of any transaction will not be construed as an admission that the investment adviser or investment adviser representative has any direct or indirect beneficial ownership in the security.
(iii) An investment adviser shall implement adequate procedures and use reasonable diligence to promptly obtain reports of all transactions required to be recorded.
(14) A copy of the written statement and the amendment or revision, given or sent to a client or prospective client of the investment adviser under § 404.011 (relating to investment adviser brochure disclosure), and a record of the dates that the written statement, and the amendment or revision, was given, or offered to be given, to a client or prospective client who subsequently becomes a client.
(15) If the adviser obtained a client by means of a solicitor to whom the adviser paid a cash fee:
(i) Evidence of a written agreement to which the adviser is a party related to the payment of the fee.
(ii) A signed and dated acknowledgment 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.
(iii) A copy of the solicitor’s written disclosure statement if required under § 404.012 (relating to cash payment for client solicitation).
(16) Accounts, books, internal working papers, and any other records or documents 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:
(i) Includes electronic media that the investment adviser circulates or distributes, directly or indirectly, to two or more persons, other than persons connected with the investment adviser.
(ii) Except that, 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 will be considered to satisfy the requirements of this paragraph.
(17) A file containing a copy of the written communications received or sent regarding any litigation involving the investment adviser or an investment adviser representative or employee, and regarding the written customer or client complaint.
(18) Written information about an investment advisory client that is the basis for making a recommendation or providing investment advice to the client.
(19) Written procedures to supervise the activities of employees and investment adviser representatives that are reasonably designed to achieve compliance with applicable securities laws and regulations.
(20) A file containing a copy of the documents, other than notices of general dissemination, that were filed with or received from a state or Federal agency or self-regulatory organization and that pertains to the registrant or its investment adviser representatives as that term is defined in § 102.021(a) (relating to definitions), which file may include all applications, amendments, renewal filings and correspondence.
(21) A copy, with original signatures of the investment adviser’s appropriate signatory and the investment adviser representative, of the initial Form U-4 and the amendment to Disclosure Reporting Pages (DRPs U-4) shall be retained by the investment adviser filing on behalf of the investment adviser representative and made available for inspection on regulatory request.
(22) A ledger or other listing of all securities or funds held or obtained in this manner if the adviser has inadvertently held or obtained a client’s securities or funds and returned them to the client within 3 business days or has forwarded third-party checks within 24 hours under the definition of “custody” in § 102.021(a), which ledger or other listing includes all of the following information:
(i) The issuer.
(ii) The type of security and series.
(iii) The date of issue.
(iv) The denomination, interest rate and maturity date for debt instruments.
(v) The certificate number, including alphabetical prefix or suffix.
(vi) The name in which the security is registered.
(vii) The date given to the adviser.
(viii) The date sent to client or sender.
(ix) The form of delivery to client or sender, or copy of the form of delivery to client or sender.
(x) The mail confirmation number, if applicable, or confirmation by client or sender of the fund’s or security’s return.
(23) Written acknowledgements of receipts obtained from clients under § 404.012(b)(5) and copies of the disclosure documents provided to clients by solicitors under § 404.012(b)(4).
(24) Written procedures relating to the business and continuity plan required under § 304.071 (relating to business continuity and succession planning).
(b) For purposes of subsection (a)(12) and (13):
(1) A transaction shall be recorded not later than 10 days after the end of the calendar quarter in which the transaction was effected.
(2) An investment adviser is “primarily engaged in a business or businesses other than advising investment advisory clients” when, for each of its most recent 3 fiscal years or for the time since organization, whichever is less, the investment adviser derived, on an unconsolidated basis, more than 50% of the following from other business or businesses:
(i) Total sales and revenues.
(ii) Income, or loss, before income taxes and extraordinary items.
(3) An investment adviser shall implement adequate procedures and use reasonable diligence to promptly obtain reports of all transactions required to be recorded.
(c) If an investment adviser subject to subsection (a) has custody, the records required to be made and kept under subsection (a) also include all of the following:
(1) A journal or other record showing all purchases, sales, receipts and deliveries of securities (including certificate numbers) for all accounts and all other debits and credits to the accounts.
(2) A separate ledger account for each client showing all purchases, sales, receipts and deliveries of securities, the date and price of each purchase and sale, and all debits and credits.
(3) A copy of confirmations of all transactions effected by or for the account of any client.
(4) A record for each security in which any client has a position, which record shall show the name of each client having any interest in each security, the amount or interest of each client, and the location of each security.
(5) A copy of documents executed by the client, including a limited power of attorney, under which the adviser is authorized or permitted to withdraw a client’s funds or securities maintained with a custodian on the adviser’s instruction to the qualified custodian.
(6) A copy of each of the client’s quarterly account statements, as generated and delivered by the qualified custodian. If the adviser also generates a statement that is delivered to the client, the adviser shall also maintain copies of the statements along with the date the statements were sent to the clients.
(7) If an investment adviser has custody because it advises a pooled investment vehicle and is relying on the exception from the minimum net worth requirement in § 303.042(a)(3)(ii) (relating to investment adviser capital requirements), the adviser shall also keep:
(i) True, accurate and current account statements.
(ii) Documentation of the date of the audit.
(iii) A copy of the audited financial statements.
(iv) Evidence of the mailing of the audited financial to all limited partners, members or other beneficial owners within 120 days of the end of its fiscal year.
(8) Records relating to the adviser’s appointment as trustee and the identities of the beneficial owners of the trust if an investment adviser acts as trustee for a beneficial trust under § 102.021(a).
(d) An investment adviser subject to subsection (a) that gives investment supervisory or management service to a client shall, with respect to the portfolio being supervised or managed and to the extent that the information is reasonably available to or obtainable by the investment adviser, make and keep true, accurate and current:
(1) A separate record for each client showing the securities purchased and sold, and the date, amount and price of each purchase and sale.
(2) For each security in which any client has a current position, information from which the investment adviser can promptly furnish the name of each client, and the current amount or interest of the client.
(e) Books or records required under this section may be maintained by the investment adviser so that the identity of a client to whom the investment adviser gives investment supervisory services is indicated by numerical or alphabetical code or some similar designation.
(f) An investment adviser subject to subsection (a) shall maintain all of the following:
(1) Books and records required to be made under subsections (a), (b) and (c)(1) (except for books and records required to be made under subsection (a)(11) and (16)) in an easily accessible place for at least 5 years from the end of the fiscal year during which the last entry was made on record, the first 2 years being in the principal office of the investment adviser.
(2) Partnership articles and any amendments, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, in the principal office of the investment adviser for at least 3 years after termination of the enterprise.
(3) Books and records required to be made under subsection (a)(11) and (16) in an easily accessible place for at least 5 years, the first 2 years being in the principal office of the investment adviser, from the end of the fiscal year during which the investment adviser last published or otherwise disseminated, directly or indirectly, the notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication including by electronic media.
(4) Notwithstanding other record preservation requirements of this section, the following records or copies at the business location of the investment adviser from which the customer or client is being provided or has been provided with investment advisory services:
(i) Records required to be preserved under subsections (a)(3), (7)—(10), (14), (15), (17)—(19) and (22)—(24), (b) and (c).
(ii) Records or copies required under subsection (a)(11) and (16) which records or related records identify the name of the investment adviser representative providing investment advice from that business location, or which identify the business location’s physical address, mailing address, e-mail address or telephone number.
(g) An investment adviser subject to subsection (a), before ceasing to do business as an investment adviser, shall:
(1) Arrange and be responsible for the preservation of the books and records required to be maintained and preserved under this section for the remainder of the period specified in this section.
(2) Notify the Department in writing of the exact address where the books and records will be maintained during the period.
(h) Record storage requirements are as follows:
(1) Records required to be maintained and preserved for the required time by this section shall:
(i) Be able to be immediately produced or reproduced.
(ii) Be maintained and preserved in at least one of the following manners:
(A) Paper or hard copy form, as those records are kept in their original form.
(B) Micrographic media, including microfilm, microfiche or any similar medium.
(C) Electronic storage media, including any digital storage medium or system that meets the terms of this section.
(2) The investment adviser shall:
(i) Arrange and index the records in a way that permits easy location, access and retrieval of any particular record.
(ii) Provide promptly any of the following which the Department by its examiners or other representatives may request:
(A) A legible, true and complete copy of the record in the medium and format in which it is stored.
(B) A legible, true and complete printout of the record.
(C) A means to access, view and print the records.
(iii) Store separately from the original a copy of the record for the time required for preservation of the original record.
(3) For records created or maintained on electronic storage media, the investment advisor shall establish and maintain procedures to:
(i) Maintain and preserve the records to reasonably safeguard them from loss, alteration or destruction.
(ii) Limit access to the records to properly authorized personnel and the Department, including its examiners and other representatives.
(iii) Reasonably ensure that any reproduction of a nonelectronic original record on electronic storage media is complete, true and legible when retrieved.
(i) A book or other record made, kept, maintained and preserved in compliance with Rules 17a-3 (17 CFR 240.17a-3) (relating to records to be made by certain exchange members, brokers and dealers) and 17a-4 (17 CFR 240.17a-4) (relating to records to be preserved by certain exchange members, brokers and dealers) under the Securities Exchange Act of 1934 (15 U.S.C.A. § § 78a—78qq), which is substantially the same as the book or other record required to be made, kept, maintained and preserved under this section, is considered to be made, kept, maintained and preserved in compliance with this section.
(j) The requirements of this section do not apply to an investment adviser registered under section 301 of the act (70 P.S. § 1-301) that meets all of the following conditions:
(1) Has its principal place of business in a state other than this Commonwealth.
(2) Is licensed as an investment adviser in the state where it has its principal place of business.
(3) Is in compliance with the recordkeeping requirements of the state in which it has its principal place of business.
Authority The provisions of this § 304.012 amended under sections 304(a), (b) and (e) and 609(a) of the Pennsylvania Securities Act of 1972 (70 P.S. § § 1-304(a), (b) and (e) and 1-609(a)); section 202.C of the Department of Banking and Securities Code (71 P.S. § 733-202.C); and section 9(b) of the Takeover Disclosure Law (70 P.S. § 79(b)).
Source The provisions of this § 304.012 adopted March 29, 1974, effective March 30, 1974, 4 Pa. B. 582; amended January 17, 1992, effective January 18, 1992, 22 Pa.B. 289; amended September 1, 2000, effective September 2, 2000, 30 Pa.B. 4551; transferred and renumbered from 64 Pa. Code § 304.012, December 14, 2012, effective December 15, 2012, 42 Pa.B. 7533; amended January 12, 2018, effective January 13, 2018, 48 Pa.B. 389. Immediately preceding text appears at serial pages (364754) to (364763).
Notes of Decisions Sufficiency
Although the investigator testified that she believed the licensee had not kept required monthly trial balances, she failed to provide the requisite specific, factual basis for her testimony. Therefore, theevidence did not support the Commission’s finding of a violation. Kalin v. Securities Commission, 805 A.2d 1258 (Pa. Cmwlth. 2002).
Where the investigator testified that the licensee failed to maintain required records, and the licensee so admitted, but that he was unaware of his duty to do so, the Commission’s finding of violation was supported by substantial evidence. Kalin v. Securities Commission, 805 A.2d 1258 (Pa. Cmwlth. 2002).
Cross References This section cited in 10 Pa. Code § 102.021 (relating to definitions).
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