Employee communications relating to a registered investment adviser’s business, including emails and instant messages, are considered books and records by the U.S. Securities and Exchange Commission (“SEC”).
Advisers have a responsibility to maintain these communications in accordance with SEC Rule 204-2 under the Investment Advisers Act of 1940. As a result, it is commonplace for advisers to engage a professional archiving vendor to preserve such electronic communications and facilitate compliance testing.
There are two primary reasons for performing electronic communication reviews. Firstly, to ensure all employee communications are being captured and secondly to review the content of messages to ensure compliance with the adviser’s policies and procedures.
Retention Functionality
Advisers should test the functionality of their email retention system. This review typically includes basic tests such as searching by employee names, time frames, key words, and attachments. In addition, the adviser typically will confirm that other employee electronic communications that are required to be retained (e.g. instant messages and Bloomberg Mail) are also archiving properly.
Content Reviews
Many advisers struggle to generate thoughtful reviews that offer meaningful results. With proper structuring, an adviser can vary the parameters of a basic functionality test and gain the benefit of an additional level of efficient policy review. Form ADV, the risk matrix and/or the annual compliance review can provide insight to issues the adviser might consider testing. For example, there may be an affiliation that could be seen as a possible conflict of interest or recent compliance breach that requires additional monitoring. Kinetic Partners has assisted clients in developing communication reviews that enhance controls around the adviser’s policies and procedures. Specific topics the adviser can monitor include insider trading, marketing, best execution, political contributions and disciplinary matters.
Not only can these reviews provide immediate access to one-off breaches of policy, they also can paint an overall picture of the adviser, possibly highlighting patterns that require further investigation.
Frequency of Reviews
Electronic message retention and content reviews are typically conducted on a quarterly basis. However, depending on the nature of the risk involved, content reviews may be conducted more frequently.
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