Investment Adviser Representative Supervision

Every investment adviser (IA) has a duty to supervise its investment adviser representatives (IARs) and associated persons. Understanding these supervision requirements is heavily tested on the Series 65.

Written Policies and Procedures (SEC Rule 206(4)-7)

• 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

Supervisory Obligations

Investment advisers have an ongoing duty to supervise all IARs and associated 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

Liability for Failure to Supervise

• 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.