By James Hamilton, J.D., LL.M.
In remarks recently released by the SEC, Commissioner Paul Atkins noted that 488 hedge fund advisers have withdrawn from SEC registration since the hedge fund adviser registration requirement was vacated by a federal appeals court. Speaking to the Investment Adviser Association in Austin, the commissioner said that a primary reason for the registration withdrawals is the problems with existing SEC recordkeeping rules for advisers, which often arise in connection with examinations by SEC staff.
In many of these exams, the staff has focused increasingly on emails and other electronic messages, he said, which can provide important insight into what is going on at a firm. Investment Advisers Act Rule 204-2 requires advisers to retain records, communications and other types of information. Over the last several years, the SEC staff, through the inspection and enforcement process, has informally applied the rule to e-mail. Commenters have noted that this has raised a host of difficult compliance issues for investment advisers.
In the view of Comm. Atkins, the intensified interest in e-mail has proven frustrating and costly for firms. Some firms have complained that the SEC staff's e-mail requests go beyond the scope of the records that the rules require them to keep. Even if firms have copies of the requested e-mails, he noted, they incur substantial costs in searching for and producing them within the deadlines set by the staff. He posited that these concrete costs might be dwarfed by lost efficiencies and impeded customer service if firms elect to stop or curtail e-mail usage in order to avoid having the burden of complying with staff requests. He advised the SEC staff to look at e-mails as part of its examinations, but to also give advisory firms clear guidance on what electronic messages they need to keep, how they need to keep them, and how long they need to keep them.