It is remarkable the number of buy-side firms that have overlooked the importance of maintaining proper trade tickets and order memoranda in a timely fashion. Three weeks ago, the US Securities and Exchange Commission (SEC) charged New York-based Ark Asset Management Co., Inc. with fraudulent trade allocation as well as disclosure and books-and-records violations. This latter charge involved violations of Section 204 of the Advisers Act and Rule 204-2(a)(3) which requires registered investment advisers to make and keep true, accurate and current order memoranda for the purchase and sale of any security on behalf of a client.
Today many investment managers and hedge funds utilize electronic order management systems to track order creation, modification and deletion as well as trade execution details. These same systems typically will calculate order size, allocate block orders across multiple accounts and track trade execution details. Some more sophisticated systems will further perform pre- or post-trade compliance checks to ensure portfolios remain in compliance with client- or firm-imposed guidelines and restrictions, such as concentration limits or list restrictions (e.g., ‘no tobacco’).
Automated systems, however, can obfuscate for some just what is happening and the information required to ensure a firm remains in compliance with the recordkeeping requirement. Likewise, Rule 204-2(a)(3) is clear as mud for many. So we shall try to shed a little light on best practice for this aspect of maintaining books and records.