We’re seeing it more and more frequently: State and SEC auditors are showing heightened interest in the books and records of RIA firms. If you aren’t familiar with the SEC Books and Records Rule, 204-2(a), now is the time to give it an in-depth look. To help you get familiar with the rule’s requirements, here’s a quick rundown of what you should know.
Does the SEC Books and Records Rule apply to you?
If your RIA firm has more than $100 million AUM, you’re required to register with the SEC and are therefore subject to the rule. Regardless, most states have books and records rule that mirror the SEC’s. So, even if you aren’t registered with the SEC, it’s likely a books and records rule will apply to you.
What does the Books and Records rule entail?
The SEC Books and Records Rule includes six requirements related to keeping accurate books and records, such as adjusted journal entries, general ledgers, bank statements, cancelled checks, and the like. Generally, RIA firms are required to keep these types of records for five years. You must keep your most current two years of records on your firm’s premises. You can keep the later three years of records off-site.
Does your RIA firm need audited financial statements?
For SEC purposes, RIAs are not required to have audited financial statements, but it’s certainly possible this requirement could show up down the road. That said, your RIA firm’s books and records must be maintained under generally accepted accounting principles (GAAP).
Are you subject to a net capital requirement?
RIAs are not subject to a net capital requirement per the SEC. However, your RIA firm must be solvent; you can’t be going into bankruptcy or in a negative capital situation.
Certain states, on the other hand, do have rules around net capital. Depending on where your RIA firm is registered, this type of requirement could apply to you.
Do you know your state’s books and records rules?
Most states have their own books and records rules, which, as I mentioned earlier, are typically very close to the SEC requirements. Most states require a financial statement balance sheet, income statement, and cash flow. Although uncommon, certain states do require firms to submit audited financial statements or balance sheets. The bottom line: Know your state’s rules and make sure you’re in compliance.
More rules could be coming…
At the time of this writing, the SEC has proposed a rule that would require RIA firms outsourcing certain functions to perform and document due diligence before retaining a service provider. This puts more responsibility on your RIA firm to do its homework—and more administrative work—when hiring a provider for outsourced functions.
Currently, functions such as sub advisor, client services, cybersecurity, investment risk analysis, and trade communications are included on the SEC’s list. The list does not yet include the selection of an outsourced CFO, but that doesn’t mean it won’t be included in the final rule.
Comply with confidence.
As the SEC Books and Records Rule becomes more of a focus area for auditors, it’s important to get familiar with the rule as soon as possible. Failing to comply can lead to costly penalties—and no RIA firm wants to deal with those. If you’re unsure about the rule and its impact on your RIA firm, we’re here to help. Contact us today with any questions you have.