Mich. Admin. Code R. 451.4.24

Current through Vol. 24-21, December 1, 2024

Section R. 451.4.24 - Records to be maintained by investment advisers

Rule 4.24.

(1) For the purposes of this rule, "access person" means when used in connection with a company primarily engaged in a business or businesses other than advising investment advisory clients, a person who has access to nonpublic information regarding any clients purchase or sale of securities, or nonpublic information regarding the portfolio holdings of any reportable fund, and any person who is involved in making securities recommendations to clients, or who has access to such recommendations that are nonpublic, and any partner, officer, or director of the investment adviser.

(2) Every investment adviser registered, or required to be registered, under the act shall make and keep true, accurate, and current all of the following books, ledgers, and records:

(a) 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.

(b) General and auxiliary ledgers, or other comparable records, reflecting asset, liability, reserve, capital, income, and expense accounts.

(c) A record of each order given by the investment adviser for the purchase or sale of a 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 a modification or cancellation of any such order or instruction. The record must do all of the following: show the terms and conditions of the order, instruction, modification, or cancellation; identify the person connected with the investment adviser who recommended the transaction to the client and the person who placed the order; and show the account for which entered, the date of entry, and the bank, broker-dealer by or through whom executed where appropriate. Orders entered pursuant to the exercise of discretionary power must be so designated.

(d) All checkbooks, bank statements, canceled checks, and cash reconciliations of the investment adviser.

(e) All bills or statements, or copies of, paid or unpaid, relating to the investment adviser's business.

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

(g) Copies of all written communications received and sent by the investment adviser relating to all of the following:

(i) Any recommendation made or proposed to be made and any advice given or proposed to be given.

(ii) Any receipt, disbursement, or delivery of funds or securities.

(iii) The placing or execution of any order to purchase or sell any security.

(iv) The investment adviser shall not be required to keep any unsolicited market letters and other similar communications of general public distribution not prepared by or for the investment adviser.

(v) 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 shall not be required to keep a record of the names and addresses of the persons to whom the notice, circular, or advertisement was sent. If the notice, circular, or advertisement is distributed to persons named on a list, the investment adviser shall retain with the copy of the notice, circular, or advertisement a memorandum describing the list and its source.

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

(i) A copy of all powers of attorney and other evidences of the granting of any discretionary authority by a client to the investment adviser.

(j) 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.

(k) A copy of each notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication including by electronic media that the investment adviser directly or indirectly circulates or distributes to 10 or more persons, other than persons connected with the investment adviser. If the notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication recommends the purchase or sale of a specific security and does not state the reasons for the recommendation, a memorandum of the investment adviser indicating the reasons for the recommendation shall be kept.

(l) A record of every transaction in a security in which the investment adviser or any access person of the investment adviser has, or by reason of any transaction acquires, any direct or indirect beneficial ownership. The record must state the title and amount of the security involved; the date and nature of the transaction, for example the purchase, sale, or other acquisition or disposition; the price at which it was effected; and, the name of the broker-dealer or bank with or through whom the transaction was effected. A record under this subrule does not need to be kept for a transaction in a security involving any of the following:

(i) Direct obligations of the government of the United States.

(ii) Bankers acceptances, bank certificates of deposit, commercial paper, and high quality short-term debt instruments, including repurchase agreements.

(iii) Shares issued by money market funds.

(iv) Shares issued by open-end funds other than reportable funds.

(v) Shares issued by unit investment trusts that are invested exclusively in 1 or more open-end funds, none of which are reportable funds.

(m) The record may also contain a statement declaring that the reporting or recording of any transaction is not as an admission that the investment adviser or advisory representative has any direct or indirect beneficial ownership in the security.

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

(o) A record is not required for either transactions effected in any account over which neither the investment adviser nor any advisory representative of the investment adviser has any direct or indirect influence or control; or for transactions in securities that are direct obligations of the United States.

(p) An investment adviser shall not be deemed to have violated the provisions of this subdivision because of the failure to record securities transactions of any advisory representative 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.

(q) Notwithstanding the provisions of subdivision (l) of this subrule, where the investment adviser is primarily engaged in a business or businesses other than advising investment advisory clients, a record must be maintained of every transaction in a security in which the investment adviser or any access person of the investment adviser has, or by reason of any transaction acquires, any direct or indirect beneficial ownership. The record must state all of the following:

(i) The title and amount of the security involved.

(ii) The date and nature of the transaction, for example purchase, sale, or other acquisition or disposition.

(iii) The price at which it was effected.

(iv) The name of the broker-dealer or bank with or through whom the transaction was effected.

(v) The record may also contain a statement declaring that the reporting or recording of any transaction is not an admission that the investment adviser or advisory representative has any direct or indirect beneficial ownership in the security.

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

(vii) A record is not required for either of the following:

(A) Transactions effected in any account over which neither the investment adviser nor any advisory representative of the investment adviser has any direct or indirect influence or control.

(B) Transactions in securities that are direct obligations of the United States.

(viii) An investment adviser is deemed to be "primarily engaged in a business or businesses other than advising investment advisory clients" if, for each of its most recent 3 fiscal years or for the period of time since organization, whichever is less, the investment adviser derived, on an unconsolidated basis, more than 50% of total sales and revenues, and more than 50% of income or loss before income taxes and extraordinary items, from other business or businesses that did not primarily involve the giving of investment advice.

(ix) An investment adviser is not deemed to have violated the provisions of this subdivision because of the failure to record securities transactions of an advisory representative 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.

(r) A copy of each written statement and each amendment or revision, given or sent to any client or prospective client of the investment adviser pursuant to the provisions of R 451.4.19; summary of material changes that is required by part 2 of Form ADV but is not contained in the written statement; and a record of the dates that each written statement, including an amendment or revision to the written statement, and a summary of material changes was given, or offered to be given, to any client or prospective client who subsequently becomes a client.

(s) All accounts, books, internal working papers, and any 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 recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin, or other communication that the investment adviser circulates or distributes to 2 or more persons, other than persons connected with the investment adviser. With respect to the performance of managed accounts only, the retention of all account statements, reflecting 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 is deemed to satisfy the requirements of this paragraph.

(t) A file containing a copy of all written communications received or sent regarding any litigation involving the investment adviser or an investment advisers representative or employee and regarding any customer or client complaint.

(u) Written information about each investment advisory client that is the basis for making any recommendation or providing any investment advice to such client.

(v) Written procedures regarding the supervision of employees and investment adviser representatives that are reasonably designed to achieve compliance with the act and rules promulgated under the act, and federal laws and rules.

(w) A copy of each document, other than any notices of general dissemination, that was filed with or received from any state or federal agency or self-regulatory organization and that pertains to the registrant or its investment adviser representatives which file should contain, but is not limited to, all applications, amendments, renewal filings, and correspondence.

(x) A record with original signatures of the investment advisers appropriate signatory and the investment adviser representative, of each initial Form U4 and each amendment to the disclosure reporting pages.

(y) If an investment adviser inadvertently holds or obtains a clients securities or funds and returns them within 3 business days, the investment adviser shall keep a copy of each such financial instrument and a ledger or other listing of all securities or funds received, including all of the following information:

(i) Issuer, payor, or maker, as may be applicable.

(ii) Type of security and series.

(iii) Date of issue.

(iv) For debt instruments, the denomination, interest rate, and maturity date.

(v) Certificate number, including alphabetical prefix or suffix.

(vi) Name in which registered.

(vii) Date given to the investment adviser.

(viii) Date sent to client or sender.

(ix) Form of delivery to client or sender, or copy of the form of delivery to client or sender.

(x) Mail confirmation or courier tracking number, if applicable, or confirmation by client or sender of the funds or securitys return.

(z) If an investment adviser obtains possession of securities that are acquired from the issuer in a transaction or chain of transactions not involving any public offering that meet the exception from custody under R 451.4.13, the investment adviser shall keep both of the following records:

(i) A record showing the issuer or current transfer agents name, address, phone number, and other applicable contact information pertaining to the party responsible for recording client interests in the securities.

(ii) A copy of any legend, shareholder agreement or other agreement providing that those securities are transferable only with prior consent of the issuer or holders of the outstanding securities of the issuer.

(aa) An investment adviser that exercises voting authority with respect to client securities shall, with respect to those clients, make and retain all of the following:

(i) Copies of all policies and procedures required by R 451.4.20.

(ii) A copy of each proxy statement that the investment adviser receives regarding client securities. An investment adviser may satisfy this requirement by relying on a third party to make and retain, on the investment advisers behalf, a copy of a proxy statement, provided that the adviser has obtained an undertaking from the third party to provide a copy of the proxy statement promptly upon request, or may rely on obtaining a copy of a proxy statement from the EDGAR system.

(iii) A record of each vote cast by the investment adviser on behalf of the client. An investment adviser may satisfy this requirement by relying on a third party to make and retain, on the investment advisers behalf, a record of the vote cast, provided that the adviser has obtained an undertaking from the third party to provide a copy of the record promptly upon request.

(iv) A copy of any document created by the adviser that was material to making a decision how to vote proxies on behalf of a client or that memorializes the basis for that decision.

(v) A copy of each written client request for information on how the adviser voted proxies on behalf of the client, and a copy of any written response by the investment adviser to any written or oral client request for information on how the adviser voted proxies on behalf of the requesting client.

(3) If an investment adviser has custody, the records required to be made and kept under subrule (2) of this rule must include all of the following:

(a) A copy of all documents executed by a client, including a limited power of attorney, under which the investment adviser is authorized or permitted to withdraw a clients funds or securities maintained with a custodian upon the investment advisers instruction to the custodian.

(b) 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.

(c) A separate ledger account for a client showing all purchases, sales, receipts and deliveries of securities, the date and price of each purchase and sale, and all debits and credits.

(d) Copies of confirmations of all transactions effected by or for the account of a client.

(e) A record for each security in which a client has a position. This record must show at a minimum the name of each client having any interest in each security, the amount of interest of each client, and the location of each security.

(f) A copy of the clients monthly or quarterly account statements, as may be applicable, as generated and delivered by the qualified custodian. If the investment adviser also generates a statement that is delivered to the client, the investment adviser shall also maintain copies of such statements along with the date such statements were sent to the client.

(g) If applicable to the investment advisers situation, a copy of the special examination report verifying the completion of the examination by an independent certified public accountant and describing the nature and extent of the examination.

(h) A record of any finding by the independent certified public accountant of any material discrepancies found during the examination.

(i) If applicable, evidence of the clients designation of an independent representative.

(4) If an investment adviser has custody because it advises a pooled investment vehicle, the investment adviser shall also keep in addition to any other applicable record retention requirements, the following records:

(a) True, accurate, and current account statements.

(b) Where the investment adviser complies with the exception found in 17 C.F.R. § 275.206(4)-2(b)(4), the records required to be made and kept must include all of the following:

(i) The date or dates of the audit.

(ii) A copy of the audited financial statements.

(iii) Evidence of the mailing of the audited financial statements to all limited partners, members, or other beneficial owners within 120 days of the end of its fiscal year.

(5) An investment adviser subject to subrule (2) of this rule who renders any investment supervisory or management service to any 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 both of the following:

(a) Records showing separately for each client the securities purchased and sold, and the date, amount, and price of each purchase and sale.

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

(6) Any books or records required by this rule may be maintained by the investment adviser in such manner that the identity of any client to whom the investment adviser renders investment supervisory services is indicated by numerical or alphabetical code or some similar designation.

(7) Every investment adviser subject to subrule (2) of this rule shall preserve all of the following records in the following manner:

(a) All books and records required to be made under the provisions of subrules (2) to (3)(a) of this rule, except for books and records required to be made under the provisions of subrule (2)(k) and (s) of this rule, must 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 record, the first 2 years in the principal office of the investment adviser.

(b) Partnership agreements, limited liability company articles of organization, operating agreements, articles of incorporation, charters, and similar business formation documents, any amendments to such documents, minute books, and stock ledgers of the investment adviser and of any predecessor, must be maintained in the principal office of the investment adviser and preserved until at least 3 years after termination of the enterprise.

(c) Books and records required to be made under the provisions of subrules (1)(s) and (2)(k) of this rule, must be maintained and preserved in an easily accessible place for a period of not less than 5 years, the first 2 years 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.

(d) Books and records required to be made under the provisions of subrule (2)(t) to (y) of this rule, must 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 such record, the first 2 years in the principal office of the investment adviser, or for the time period during which the investment adviser was registered or required to be registered in the state, if less.

(e) Notwithstanding other record preservation requirements of this rule, all of the following records or copies must be maintained 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 subrules (2)(c), (g) to (j), (r), (t) to (v), (3) and (4) of this rule.

(ii) Records or copies required under the provision of subrule (2)(k) and (s) of this rule 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 locations' physical address, mailing address, electronic mailing address, or telephone number.

(8) An investment adviser subject to subrule (2) of this rule, that ceases to conduct or discontinues business as an investment adviser shall arrange for and be responsible for the retention of the books and records required to be maintained and preserved under this rule for the remainder of the period specified in this rule, and shall notify the administrator in writing prior to ceasing to conduct or discontinuing business of the exact address where the books and records are maintained.

(9) Pursuant to subrule (6) of this rule, the records required to be maintained and preserved may be immediately produced or reproduced, and maintained and preserved for the required time, by an investment adviser on any of the following:

(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 rule.

(10) Pursuant to subrule (6) of this rule, the investment adviser shall do both of the following:

(a) Arrange and index the records in a way that permits easy location, access, and retrieval of any particular record.

(b) Provide promptly any of the following that the administrator, by its examiners or other representatives, may request:

(i) A legible, true, and complete copy of the record in the medium and format in which it is stored.

(ii) A legible, true, and complete printout of the record.

(iii) Means to access, view, and print the records.

(11) Pursuant to subrule (6) of this rule, in the case of records created or maintained on electronic storage media, the investment adviser shall establish and maintain procedures to do all of the following:

(a) Maintain and preserve the records, so as to reasonably safeguard them from loss, alteration, or destruction.

(b) Limit access to the records to properly authorized personnel and the administrator, including its examiners and other representatives.

(c) Reasonably ensure that any reproduction of a non-electronic original record on electronic storage media is complete, true, and legible when retrieved.

(d) Separately store, for the time required for preservation of the original record, a duplicate copy of the record on any medium allowed by this rule.

(12) A book or other record made, kept, maintained, and preserved in compliance with rules 17a-3 and 17a-4 under the securities exchange act of 1934, 17 C.F.R. § 240.170a-3 and 17 C.F.R. §240.170a-4 which is substantially the same as the book or other record required to be made, kept, maintained, and preserved under this rule, must be made, kept, maintained, and preserved in compliance with this rule.

(13) An investment adviser registered, or required to be registered, in this state and that has its principal place of business in a state other than this state is exempt from the requirements of this rule, provided the investment adviser is registered or licensed in such state and is in compliance with such state's recordkeeping requirements.

Mich. Admin. Code R. 451.4.24

2019 MR 1, Eff. 7/3/2019