AI notetakers are everywhere. The conversation about whether and how to use them – from consent obligations and confidentiality risks to which platforms are appropriate for business use – is already well underway. This post is narrower and examines what Rule 204-2 under the Investment Advisers Act of 1940 – the books and records rule for registered investment advisers – actually requires of firms that use these tools. The short answer is that the analysis is more complex than most firms have recognized, and the practical response is not to assess transcripts one by one, but to make deliberate category-level decisions before the question arises.
Note: Rule 204-2 applies to registered advisers. Exempt reporting advisers are not subject to it, but the practical and policy questions raised by AI notetakers apply regardless of registration status. For a broader discussion of issues to consider when using AI notetakers, including consent and confidentiality considerations, see AI Note-Taking: Many Things to Ponder and How to (Appropriately) Use AI to Take Notes.
The framing problem
The wave of off-channel communications enforcement actions over the last several years under the prior administration conditioned firms to think about recordkeeping as a communications problem – who sent what, over what channel, and was it retained and supervised. That framework is not wrong, but it does not exhaust the analysis.
Rule 204-2 is broader. The term “record” sweeps in “transcribed information of any type, whether expressed in ordinary or machine language” – a formulation that has been on the books for decades and is remarkably technology-neutral. It was not written for AI, but it captures AI-generated notes, summaries and transcripts. A registered adviser using an AI notetaker is generating records within the meaning of the rule whether it realizes it or not.
What to do about it
The impracticality of assessing transcripts in real time points toward the same conclusion for every firm: Policy decisions need to be made in advance, at the category level. For some call types, the right answer may be that AI notetakers should not be used at all – calls with counsel, compliance committee meetings or any context where the firm would prefer not to hand a transcript to a regulator. For others, the calculus may favor use, with clear rules about what gets retained and in what form. Many firms will end up with a hybrid.
There is no off-the-shelf policy or checklist that will suit every firm. The task requires assessing the firm’s size, mix of activities, which provisions of Rule 204-2 are most relevant to how it actually operates and its appetite for examination risk. Additional questions, such as what form of AI output to retain, who reviews it and when, how to handle notice and consent obligations, how to manage vendor risk, and who owns the policy, need to be worked through as part of that process.
Firms should also resist the assumption that retaining everything is the conservative approach. It is not. Transcripts that are not required records give examiners more material to scrutinize without adding compliance credit. An examiner who obtains a transcript the firm was not required to keep can review it, scrutinize it and potentially use it against the firm. Under-retention carries a different risk: If a transcript was a required record, and it was deleted, the deletion may itself be the violation.
Why the analysis is harder than it looks
A meaningful strand of recent commentary concludes that if a transcript is not transmitted – if it stays within the platform and is never emailed, shared or forwarded – it likely is not a required record under Rule 204-2. That conclusion is a useful starting point, but it addresses only part of the problem. Transmission tells you whether you have a communications problem; it does not tell you whether you have a records problem elsewhere. Given the sweeping definition of a record under Rule 204-2, an untransmitted transcript can still be a required record under a separate provision of the rule.
Rule 204-2 enumerates a laundry list of records that must be kept, and the challenge is that the list is not only extensive but also taxing to apply. Consider the range of subject matter that might arise on a call where an AI notetaker is running:
- Written communications relating to investment advice, securities recommendations or transactions – paragraph (a)(7)
- Order memoranda identifying who recommended and who placed a trade –paragraph (a)(3)
- Code of ethics violations and any action taken in response – paragraph (a)(12)(ii)
- Access person requests to acquire initial public offering or limited offering securities, and the decisions and reasons supporting those approvals – paragraph (a)(13)(iii)
- Documentation describing the method used to compute assets under management (AUM) for Form ADV Part 2 purposes where it differs from the regulatory AUM calculation for Form ADV Part 1 – paragraph (a)(14)(ii)
- Documentation substantiating the reasonable basis for concluding that a testimonial, endorsement or third-party rating complies with the marketing rule –paragraph (a)(15)(ii)
- Records necessary to form the basis for or demonstrate the calculation of performance figures or rates of return – paragraph (a)(16)
- Records documenting the annual review of the firm’s compliance policies and procedures under Rule 206(4)-7 – paragraph (a)(17)(ii)
This list is not exhaustive. It merely illustrates how many ordinary activities of a firm – investment discussions, compliance meetings, marketing reviews, operational working sessions – correspond to something the rule specifically covers.
And for a transcript that does fall within the rule’s coverage, the analysis does not simplify. The next operative question is: Does this AI transcript represent the only or most complete record of something the rule requires to be documented? Five examples illustrate why that question is harder to answer than it sounds:
- Performance records, paragraph (a)(16): The rule requires records necessary to form the basis for or demonstrate the calculation of performance figures or rates of return. If judgment calls on treatment of partial periods, fee netting or recallable capital are made only in a working session and not documented elsewhere, the transcript may be the only record of that analysis. If spreadsheets, system outputs and a written methodology independently demonstrate the calculation, it probably is not.
- Annual review documentation, paragraph (a)(17)(ii): The rule requires records documenting the annual review of the firm’s compliance policies and procedures. For a large adviser with a formal written review report, an AI transcript probably supplements it but does not substitute for it. For a newly registered adviser where the chief compliance officer conducted the annual review on a single call with compliance counsel and nothing else documents what was reviewed, what issues were identified or what remediation was decided, the transcript may be the only record of what the rule requires.
- Marketing rule substantiation, paragraph (a)(15)(ii): The rule requires documentation substantiating the adviser’s reasonable basis conclusion that a testimonial, endorsement or third-party rating complies with the marketing rule. If that determination was made on a compliance review call and nothing else captured it, the transcript may be the record the rule requires.
- Code of ethics violations, paragraph (a)(12)(ii): The rule requires a record of any violation and any action taken in response. If a compliance committee discusses a violation and reaches a disciplinary outcome during a meeting where an AI notetaker is running, the transcript may be the only record of both, particularly where no separate HR or committee documentation system exists.
- Written communications, paragraph (a)(7): The rule requires retention of originals and copies of written communications relating to investment advice, securities recommendations or transactions. A transcript that is transmitted in that context – emailed to a client, shared with a counterparty or forwarded to a sub-adviser – crosses the line from internal record to written communication, and retention is required.
For in-house counsel and compliance personnel, these examples will land differently depending on how much work the firm has already done. Some will recognize a compliance program that already captures these records. Others will be confronting the question for the first time. Either way, the level of granularity the analysis demands makes one thing clear: Policy decisions need to be made at the category level, in advance, with a clear view of how the firm actually operates. Personnel will use these tools regardless. Shadow adoption without any governing framework is a worse outcome than a considered policy that acknowledges the tradeoffs.
Future of Rule 204-2
Securities and Exchange Commission Chair Paul Atkins has been openly critical of the prior off-channel communications enforcement program, describing aspects of it as not the way a regulator should act, and has signaled that SEC staff is considering updates to Rule 204-2. The analysis being done today is inherently interim, as the regulatory framework will likely look different in a couple of years.
That does not mean the current rule can be ignored. Examiners will ask whether firms have a policy, whether they know what they are retaining and whether their approach is principled. The time to develop that answer is before the exam, not during it.
The authors
