Investment Adviser Representative Supervision
With the registration framework and exemptions covered, the final piece is the adviser's obligation to supervise the people who actually deliver advice to clients: the investment adviser representatives (IARs).
The Supervision Obligation
Investment advisers are responsible for supervising the activities of their IARs. This is not optional; it is a fundamental regulatory requirement.
Core supervisory duties:
- Establish written supervisory procedures
- Maintain those procedures on an ongoing basis
- Enforce the procedures through regular oversight and review
The supervisory system must be reasonably designed to prevent and detect violations of securities laws. "Reasonably designed" does not mean the system must catch every violation, but it must represent a genuine, thoughtful effort to oversee IAR conduct.
Think of it this way: The adviser is like a restaurant owner who hires servers. If a server gives a customer bad advice about allergens, the owner can be held responsible for not having proper training and oversight in place. The owner does not need to watch every table, but there must be a real system to catch problems.
Written Policies and Procedures
Under the NASAA Model Rule for Written Policies and Procedures, state-registered advisers must:
- Adopt written compliance policies and procedures
- Implement those policies in day-to-day operations
- Ensure policies cover key areas such as:
- Client suitability reviews
- Portfolio management practices
- Trading and allocation procedures
- Advertising and marketing compliance
- Custody and safekeeping of client assets
- Business continuity planning
Exam Tip: Gotchas
- Written procedures must be both adopted AND implemented. Simply having a policy on paper is not enough; the adviser must put those policies into practice in day-to-day operations.
Liability for IAR Conduct
| Scenario | Adviser Liability |
|---|---|
| IAR violates securities laws | Adviser may be liable for the IAR's actions |
| Adviser had adequate supervisory procedures in place and enforced them | May serve as a defense against liability |
| Adviser failed to establish or enforce supervisory procedures | Increases exposure to vicarious liability |
Exam Tip: Gotchas
- Having written procedures on file is not enough. The adviser must also enforce them. A compliance manual sitting in a drawer with no reviews or follow-up on red flags does not meet the supervision standard.
- Advisers can be held liable for IAR violations even if they did not know about them. Failure to supervise is the issue, not personal knowledge of the violation.
- "Reasonably designed" is the standard, not perfection. The system must represent a genuine effort to prevent and detect violations.