Quick Answer
Every investment adviser must supervise its representatives through written compliance policies, a designated Chief Compliance Officer, and a documented annual review. An adviser can be liable for an IAR's violations if it failed to reasonably supervise, meaning it either lacked adequate written procedures or did not enforce them.
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 Advisers Act
- Must designate a Chief Compliance Officer (CCO) responsible for administering the compliance program
- 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.
- The annual compliance review must be documented in writing. An oral review does not satisfy the requirement, even if thorough.
- "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 designated CCO, 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.