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Benefits of Electronic Signatures & Recordkeeping

Benefits of Electronic Signature & Recordkeeping – Preventing gaps

By Cory Roberson, Principal at RIA Review and RIA Consults
Industry shift towards Electronic storage (ESIGN Act)


Transitions in cloud data storage and electronic recordkeeping formatting was a dominant technology trend that influenced the practices of investment firms in the early 2000s.  With the passing of the ESIGN Act in 2000, the SEC created a series of rule amendments to determine its application for investment advisors, broker-dealers, mutual funds, and business development companies.  

What is electronic recordkeeping?

According to Rule 204-2 and similar state rules, electronic recordkeeping is defined as books and records that are converted into the following:
Formats:  Micrographic media, including microfilm, microfiche, or any similar medium; or electronic storage media, including any digital storage medium or system that meets the terms of this section.
Types: Micrographic and electronic storage (e.g. cloud, servers, etc.).

SEC Rulemaking 

Below is a summary of electronic recordkeeping policies based on firm types.

Rules 31a-2 (investment company act) – applies to mutual funds and business development companies - https://www.sec.gov/rules/final/ic-24991.htm

Rule 204-2 amendment (investment advisory act) – applies to advisors -
https://www.sec.gov/rules/final/ic-24991.htm

Rule 17a-4(f) (securities exchange act) – applies to broker-dealers -
https://www.sec.gov/rules/interp/34-44238.htm 
NASAA and State Securities interpretations

On many occasions, there is a lag time between rules passed down from SEC to state level.  Many states will either choose to adopt broad sweeping SEC rules at time of its enactment or wait a period of time.  We encourage firms to check with their applicable state securities jurisdictions for guidance into electronic recordkeeping policies.

NASAA weighs in---On May 2017, the NASAA recently issued a general policy on the use of electronic recordkeeping and offering documents.  http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2017/05/Electronic-Offering-Documents-and-Electronic-Signatures-Statement-of-Policy.pdf

Using electronic storage to solve gaps and prevent fines

Simply put, electronic recordkeeping is designed to mitigates the regulatory risks of lost paper trails amongst firms.  In 2006, U.S. investment bank Morgan Stanley was fined $15 million to resolve an investigation by U.S. regulators into its failure to retain e-mail messages, according to a regulatory filing.

For Rule 17a-4 compliance, there are a number of email-archiving compliance providers that provide automated retention and maintenance of outside of traditional electronic storage capabilities.

Our compliance software, RIA Review provides paid users with secure cloud storage capabilities powered by Google Cloud Platform.  Click Here if interested in our Compliance Management software

Trends towards moving from paper to electronic formats

Six years ago, we noticed that many of our state-registered advisory clients continued to store their records in paper format.  Since then, we’ve seen a positive shift towards electronic recordkeeping as either a firm’s primary or alternative method for storing sensitive documentation. 

Converting from paper to electronic format can be a laborious process.  Typically, the process involves going through a lot of client files, scanning documentation, and sorting out records onto a cloud-based storage solution.  Amongst our client base, we witnessed the process taking anywhere from a few months to over a year to complete. Outsourced services are available to assist with scanning or sorting of paperwork, but this method can be cost prohibitive for smaller firms. 

Types of Books and Records that can be converted to electronic formats includes:

Cash Journals (i.e. a journal or journals, including cash receipts and disbursement records)
General and subsidiary ledgers (or other comparable records) reflecting asset, liability, reserve, capital, income and expense accounts.
Check books, bank statements, cancelled checks and cash reconciliations of the investment adviser.
Bills or statements (or copies thereof), paid or unpaid, relating to the business of the investment adviser as such.
Trade Blotter (i.e. for the purchase or sale of any security, instructions from any client concerning the purchase, sale, receipt or delivery of a particular security, and modifications/cancellations).
Trial balances, financial statements that are prepared in accordance with generally accepted accounting principles.
Written communications (original/copies) received and sent by such investment adviser relating to
Copies all written agreements (or copies thereof) entered into by the investment adviser with any client or otherwise relating to the business of such investment adviser as such (i.e. discretionary, non-discretionary authority).
Copies of notices, circular, advertisement, newspaper article, investment letter, bulletin or other communication, including those transmitted by electronic media, recommending the purchase or sale of a specific security, which the investment adviser circulates or distributes, directly or indirectly, to 10 or more persons and if such notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication does not state the reasons for such recommendation, a memorandum of the investment adviser indicating the reasons.
A record of every transaction in a security in which the investment adviser or any advisory representative (as hereinafter defined) of such investment adviser has, or by reason of such transaction acquires a covered security (personal securities transactions report quarterly).

Best Practices, Security & Risks

With the recent series of disasters from hurricanes in Texas, Florida, and Puerto Rico to fires in North and Southern California, we highlight the importance of maintaining an electronic storage system for recordkeeping.

Lastly, firms should note that electronic recordkeeping is not a solution to all risks.  Data Hacks, stolen laptops, compromised passwords, or social media are a few additional issues that can occur when using electronic recordkeeping methods. 

Firms can check out our blog on IT/cybersecurity best practices here:  http://www.mycomplianceblog.com/2017/11/advisor-prep-for-data-hacks-and.html





Email us at: cory@riareview.com or call us at: 650-305-2688.

Our Mission: “Serving the Investment Community to Make a Social Impact”

Cory Roberson is Principal of RIA Review, a compliance and document management portal (www.riareview.com) - 110+ users and growing.  He is also Principal of RIA Consults -Roberson Consults Group), a consulting firm providing compliance, operations, and business development services for registered investment advisors and next-gen fintech entrepreneurs (www.riaconsults.com) more than 160 SEC & State advisors clients across the US (including a few in Europe).   Through his mission-driven arm, SoCap Missions (http://SoCapmissions.com), he has volunteered in locations such as S. Korea, China, S. Africa, Thailand, and India. 

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