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; on the exam, the state version of this duty appears as the NASAA Model Rule for Investment Adviser Written Policies and Procedures
• 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 and must have the background and skills suited to the role; for a state-registered adviser, the NASAA model rule also requires the CCO to be registered as an investment adviser representative
• Must conduct an annual compliance review (at least once a year) of both the adequacy of the policies and the effectiveness of their implementation. The compliance rule sets no format for the result. A separate rule, the books-and-records rule, requires the adviser to keep any records documenting the review

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 compliance rule requires the annual review but prescribes no report format. No signed report is filed with regulators. A question that says "based solely on the compliance rule" can therefore accept an oral presentation of the conclusions.
• The books-and-records rule separately requires the adviser to keep any records documenting the review. An adviser that keeps no record of its review is out of step with the records rule, not the compliance 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 and resources (registered as an IAR at a state-registered adviser), and an annual review of policy adequacy and implementation.
• 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 the compliance rule requires the annual review but sets no format, while the books-and-records rule requires the adviser to keep any records documenting it.