Md. Code Regs. 02.02.05.16

Current through Register Vol. 51, No. 22, November 1, 2024

Section 02.02.05.16 - Record-Keeping Requirements for Investment Advisers

A. An investment adviser registered or required to be registered in this State shall maintain and preserve 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 a security or asset, of an instruction received by the investment adviser from the client concerning the purchase, sale, receipt, or delivery of a particular security or asset, and of a modification or cancellation of an order or instruction. These 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 the order, and shall show the account for which entered, the date of entry, whether the order was entered pursuant to the exercise of discretionary power and, when appropriate, the bank, broker-dealer, or other entity or person by or through which the transaction was effected.

(4) All check books, bank statements, cancelled 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.

(6) All trial balances, financial statements, and internal audit working papers relating to the business of the investment adviser.

(7) Originals of all written communications received, and copies of all written communications sent, by the investment adviser relating to a recommendation made or proposed to be made and advice given or proposed to be given, a receipt, disbursement, or delivery of funds, securities, or assets, or the placing or execution of an order to purchase or sell a security or asset, except that:

(a) The investment adviser 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; and

(b) If the investment adviser sends a notice, circular, or other advertisement offering a report, analysis, publication, or other investment advisory service to more than 10 persons, the investment adviser is not 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 a list, the investment adviser shall retain with a copy of the notice, circular, or advertisement a memorandum describing the list and its source.

(8) A list or other record of all accounts in which the investment adviser is vested with discretionary power with respect to the funds, securities, assets, or transactions of a client.

(9) Copies of originals of all powers of attorney and other evidences of the granting of discretionary authority by a client to the investment adviser.

(10) All written agreements, or copies, entered into by the investment adviser with a client or otherwise relating to the business of the investment adviser.

(11) A copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication that the investment adviser circulates or distributes, directly or indirectly, to 10 or more persons, other than persons connected with the investment adviser, and, if the notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication recommends the purchase or sale of a specific security or asset, and does not state the reasons for this recommendation, a memorandum of the investment adviser indicating the reasons.

(12) Records of Securities or Asset Transactions.

(a) A record of every transaction involving either an asset about which advice is given or a security, in which the investment adviser or any of those persons described in §A(12)(b) and (c) of this regulation has, or by reason of the transaction acquires, any direct or indirect beneficial ownership, except transactions effected over which neither the investment adviser nor any of those persons described in §A(12)(b) and (c) of this regulation has any direct or indirect influence or control, and transactions in securities that are direct obligations of the United States.

(b) Records of transactions shall include the transactions of:

(i) A partner, officer, or director of the investment adviser;

(ii) An 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;

(iii) An employee who, in connection with the employee's duties, obtains information concerning which securities are being recommended before the effective dissemination of the recommendations or of the information concerning the recommendations; and

(iv) Any of the following persons who obtain information concerning securities recommendations being made by the investment adviser before the effective dissemination of the recommendations or of the information concerning the recommendations: a person in a control relationship to the investment adviser, an affiliated person of the controlling person, and an affiliated person of the affiliated person.

(c) "Control" has the same meaning as set forth in § 2(a)(9) of the Investment Company Act of 1940, as amended.

(d) The record shall state the title and amount of the security or asset involved, the date and nature of the transaction (that is, purchase, sale, or other acquisition or disposition), the price at which it was effected, and the name of the broker-dealer, bank, or other entity or person with or through which the transaction was effected.

(e) A transaction shall be recorded not later than 10 days after the end of the calendar quarter in which the transaction was effected.

(f) The record also may contain a statement declaring that the reporting or recording of the 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 or asset.

(g) An investment adviser will not be considered to have violated the provisions of this subsection by the investment adviser's failure to record securities or asset transactions of any of those persons described in §A(12)(b) and (c) of this regulation if the investment adviser establishes that it instituted adequate procedures and used reasonable diligence to obtain promptly reports of all transactions required to be recorded.

(13) Records of Transactions in Securities or Assets Involving Direct or Indirect Beneficial Ownership.

(a) Notwithstanding the provisions of §A(12) of this regulation, when the investment adviser is primarily engaged in a business other than advising registered investment companies or other advisory clients, a record shall be maintained of every transaction involving either an asset about which advice is given or a security, in which the investment adviser or any of those persons described in §A(13)(b) and (c) of this regulation has, or by reason of the transaction acquires, any direct or indirect beneficial ownership, except transactions effected in any account over which neither the investment adviser nor any of those persons described in §A(13)(b) and (c) of this regulation has any direct or indirect influence or control, and transactions in securities that are direct obligations of the United States.

(b) Records of transactions shall include the transactions of:

(i) A partner, officer, director, or employee of the investment adviser who makes a 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, obtains information concerning which securities are being recommended before the effective dissemination of the recommendations or of the information concerning the recommendations; and

(ii) Any of the following persons who obtain information concerning securities recommendations being made by the investment adviser before the effective dissemination of the recommendations or of the information concerning the recommendations: a person in a control relationship to the investment adviser, an affiliated person of the controlling person, and an affiliated person of the affiliated person.

(c) "Control" has the same meaning as set forth in § 2(a)(9) of the Investment Company Act of 1940, as amended.

(d) The record shall state the title and amount of the security or asset involved, the date and nature of the transaction (that is, purchase, sale, or other acquisition or disposition), the price at which it was effected, and the name of the broker-dealer, bank, or other entity or person with or through which the transaction was effected.

(e) A transaction shall be recorded not later than 10 days after the end of the calendar quarter in which the transaction was effected.

(f) The record may also contain a statement declaring that the reporting or recording of the 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 or asset.

(g) An investment adviser is "primarily engaged in a business or businesses other than advising registered investment companies or other advisory clients" if, for each of its three most recent fiscal years or for the period of time since organization, whichever is less, the investment adviser derived from the other business or businesses, on an unconsolidated basis, more than 50 percent of both its total sales and revenues and its income (or loss) before income taxes and extraordinary items.

(h) An investment adviser will not be considered to have violated the provisions of this subsection by its failure to record securities or asset transactions of any of those persons described in §A(13)(b) and (c) of this regulation if the investment adviser establishes that it 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 of each written statement, given or sent to a client or prospective client of the investment adviser in accordance with the provisions of Regulation .05 of this chapter, and a record of the dates that each written statement, and each amendment or revision of each written statement, was given, or offered to be given, to a client or prospective client who subsequently became a client.

(15) All accounts, books, internal working papers, and 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 or assets recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication that the investment adviser circulates or distributes, directly or indirectly, to 10 or more persons, other than persons connected with the investment adviser. 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 considered to satisfy the requirements of this subsection.

B. If an investment adviser subject to §A of this regulation has custody or possession of securities, assets, or funds of a client, the records required to be made and kept under §A of this regulation shall include:

(1) A journal or other record showing all purchases, sales, receipts, and deliveries of securities (including certificate numbers) and other assets (including identifying or descriptive materials as appropriate) for these accounts, as well as 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 or assets, the date and price of each purchase and sale, and all debits and credits;

(3) Copies of confirmations of all transactions effected by or for the account of each client; and

(4) A record for each security or asset in which each client has a position or ownership interest, which record shall show the name of the client having the position or interest, the amount of the position or interest, and the location of each security or asset.

C. An investment adviser subject to §A of this regulation that renders an 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 the following:

(1) True, accurate, and current records showing separately for each client the securities or assets purchased and sold, and the date, amount, and price of each purchase and sale; and

(2) For each security or asset in which a client has a current position, true, accurate, and current information from which the investment adviser can promptly furnish the name of each client, and the current amount or interest of the client.

D. Books or records required by this regulation may be maintained by the investment adviser in a manner such that the identity of a client to whom the investment adviser renders investment advisory services is indicated by numerical or alphabetical code or some similar designation.

E. Time Period.

(1) Books and records required to be made under the provisions of §§A-C(1), inclusive, of this regulation, except for books and records required to be made under the provisions of §A(11) and (15) of this regulation, shall be maintained and preserved in an easily accessible place for a period of not less than 5 years from the end of the fiscal year during which the last entry was made on the record, and for the first 2 years shall be maintained in an appropriate office of the investment adviser.

(2) Partnership articles and amendments to the partnership articles, articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor, shall be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.

(3) Books and records required to be made under the provisions of §A(11) and (15) of this regulation shall be maintained and preserved in an easily accessible place for a period of not less than 5 years, the first 2 years in an appropriate 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.

F. Before ceasing to conduct or discontinuing business as an investment adviser, an investment adviser subject to §A of this regulation shall arrange for and be responsible for the preservation of the books and records required to be maintained and preserved under this regulation for the remainder of the period specified herein, and shall notify the Commissioner in writing of the exact address at which the books and records will be maintained during this period.

G. Preservation and Maintenance.

(1) The records required to be maintained and preserved under this regulation may be immediately produced or reproduced by photograph on film or, as provided in §G(2) of this regulation, on magnetic disk, tape, or other computer storage medium, and be maintained and preserved for the required time in that form. If records are produced or reproduced by photographic film or computer storage medium, the investment advisor shall:

(a) Arrange the records and index the films or computer storage medium so as to permit the immediate location of a particular record;

(b) Be ready at all times to provide, and promptly provide, any facsimile enlargement of film or computer printout or copy of the computer storage medium that the Commissioner may request;

(c) Store separately from the original one other copy of the film or computer storage medium for the time required;

(d) With respect to records stored on computer storage medium, maintain procedures for maintenance and preservation of, and access to, records to reasonably safeguard records from loss, alteration, or destruction; and

(e) With respect to records stored on photographic film, at all times have available for examination of its records under the Maryland Securities Act, Corporations and Associations Article, §11-411, Annotated Code of Maryland, facilities for immediate, easily readable projection of the film and for producing easily readable facsimile enlargements.

(2) Under §G(1) of this regulation, an adviser may maintain and preserve on computer tape or disk or other computer storage medium records that, in the ordinary course of the adviser's business, are created by the adviser on electronic media or are received by the adviser solely on electronic media or by electronic data transmission.

H. A book or other record made, kept, maintained, and preserved in compliance with 17 CFR § 240.17a-3 (SEC Rule 17a-3, Records to be Made by Certain Exchange Members, Brokers and Dealers), that is substantially the same as the book or other record required to be made, kept, maintained, and preserved under this regulation shall be considered to be made, kept, maintained, and preserved in compliance with this regulation.

I. A record made and kept under any provision of §A of this regulation, that contains all the information required under any other provision of §A of this regulation, need not be maintained in duplicate in order to meet the requirements of the other provision of §A of this regulation.

Md. Code Regs. 02.02.05.16

Regulations .16 adopted as an emergency provision effective August 1, 1990 (17:15 Md. R. 1845)
Regulations .16 adopted as an emergency provision effective December 1, 1990 (17:26 Md. R. 2972)
Regulations .16 adopted effective March 18, 1991 (18:5 Md. R. 592)