Litigation Minute: litigation within the funding administration business


Given the complexity of the transactions and arrangements involved, investment management companies face significant and unique obligations and risks, including the need to maintain and retain certain categories of documents in the normal course of business. This obligation is further increased if a legal dispute is threatened or pending.

Companies in every industry are required to retain documents for possible use in litigation once a litigation is reasonably expected. To do this, the legal counsel should circulate a process record in the form of a letter or notice, sometimes referred to as a legal retention period, instructing recipients to keep electronic and / or printed documents that are used as evidence for can serve the anticipated litigation.

Even without legal disputes, investment advisors and other investment companies are obliged to keep certain documents for certain periods of time. Section 204 of the Investment Advisers Act of 1940 (the Advisers Act) and Rule 204-2 thereof require that registered investment advisers keep certain books, records, notices and other communications and make them available to the auditors of the Securities and Exchange Commission (SEC) for inspection. Section 17 (a) (1) of the Securities and Exchange Act of 1934 requires registered broker-dealers to keep and submit mandatory records so that regulators can conduct effective reviews. A lawsuit is likely to expand the scope of a consultant’s responsibilities for keeping documentation and may require the retention of certain materials beyond his or her legal and regulatory obligations.

Timed coordination

Once litigation begins, is threatened, or is otherwise reasonably expected, a party must take steps to ensure that potentially relevant documents are retained by imposing a legal retention requirement. A party should pause or change routine document deletion procedures to protect themselves from the destruction of potentially relevant documents, as even routine or negligent destruction of documents can have adverse consequences in the event of a litigation.


A litigation hold notice should be directed to any prospective custodian who may have potentially relevant documents. Hold notifications can be sent to all employees within a company or restricted to a specific group. If a threatened or pending litigation involves a specific investment transaction, the litigation should be directed to all employees who have been involved in or discussed the transaction.


The Litigation Hold notice instructs recipients that all potential evidence relating to the matter must be retained and that regular scheduled deletion or destruction must be paused to prevent the loss of potentially relevant documents.

The notification should indicate categories and locations of documents to be retained and advise recipients that the notification should include paper documents and any electronically stored information (ESI). For investment advisors who have been keeping records for a period of time, litigation retention may require those records to be retained beyond the date required by law and may require retention of other documents and communications not provided for by legal and regulatory frameworks .

Enforcement and Risks

Ensuring compliance with retention records is critical, as deliberately deleting or even negligently allowing the destruction of evidence can result in exclusion sanctions, adverse conclusions, legal fees and, in extreme cases, a default judgment.

The legal counsel should seek and pursue confirmation of the notice from all custodians and issue the hold notice periodically as a reminder to the custodians and to ensure that all new employees are aware of the applicable protocols.

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