Investment Adviser Representative Supervision

The rules below cover what a compliance program must contain, the day-to-day supervisory duties an adviser owes its representatives, and how liability attaches when supervision falls short.

What Must an IA's Compliance Program Include?

• Must adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the securities laws that apply to the firm: the Investment Advisers Act of 1940 for a federal covered adviser, the state's Uniform Securities Act for a state-registered adviser
• Must designate a Chief Compliance Officer (CCO) responsible for administering the compliance program. The CCO must be a supervised person with the authority and resources to develop and enforce the firm's policies, must be registered as an investment adviser representative, and must have the background and skills suited to the role
• Must conduct an annual compliance review documented in writing, reviewing both the adequacy of policies and the effectiveness of their implementation

What Ongoing Supervisory Duties Does an IA Have?

Investment advisers have an ongoing duty to supervise all IARs and supervised persons:

• Periodic review of IAR client communications, account management, and suitability documentation
• Monitoring of personal securities transactions of supervised persons
• Reviewing advisory activities for conflicts of interest
• Maintaining records of supervisory activities
• Enforcing the firm's code of ethics

When Is an IA Liable for an IAR's Violations?

• An IA can be held liable for the violations of its IARs if it failed to reasonably supervise them
• "Reasonably supervised" means the IA had written procedures in place AND enforced them
• A supervisor who is unaware of violations may still be liable if they failed to establish adequate supervisory systems

Exam Tip: Gotchas

• Having written procedures is necessary but not sufficient. The IA must also enforce and follow them. The exam tests the distinction between having policies "on paper" and actually implementing them.
• A CCO title alone is not enough. The person designated must actually have the authority, resources, and standing to enforce the program. A junior employee who reports to a mid-level manager and has no independent authority does not meet the requirement, even if formally given the title.
• The annual compliance review must be documented in writing. An oral review does not satisfy the requirement, even if thorough. Know where that comes from, because the exam can split it: the compliance rule itself prescribes no particular report format, but the books-and-records rule requires the adviser to keep records documenting the review. A review that leaves no record fails the records rule.
• "I didn't know" is not a defense. Failure to establish adequate supervisory systems creates liability regardless of actual knowledge.

What Should You Check on Exam Day?

• Remember the compliance program needs written policies, a CCO with real authority, resources, and IAR registration, and an annual review documented in writing.
• Know the supervisory duties: periodic review of IAR communications and accounts, monitoring personal trading, reviewing conflicts, keeping supervisory records, and enforcing the code of ethics.
• Remember written procedures alone are not enough; the IA must also enforce and follow them to be "reasonably supervised."
• Remember a supervisor can still be liable without actual knowledge of a violation if the firm failed to establish adequate supervisory systems.
• Remember an oral compliance review does not satisfy the annual written-review requirement.