- Amy Easterly
- Compliance Alert
Registered Investment Advisers (RIAs) owe a duty to supervise persons associated with the firm with respect to activities performed on their behalf. In recent deficiencies letters, RIAs have been criticized for failing to adequately supervise theirsupervised persons, including, Investment Adviser Representatives (IARs).
RIAs must implement written supervisory procedures to govern the conduct of supervised persons. A supervised person is any partner, officer, director, or employee of an RIA who provides investment advice on behalf of the firm.
We have attached an IAR compliance questionnaire at the below link.The questionnaire is designed to help RIAs with their supervision of IARs and other supervised persons. RIAs should require completion of this questionnaire and should implement robust supervisory procedures.
Annual IAR Compliance Questionnaire
Firms must supervise electronic communications
Electronic communications should be thorough, complete and not misleading in any way. RIAs should be on the lookout for promissory language and guarantees, as well as marketing hyperbole.
In the context of the SEC rule, written communication to one person is not an advertisem*nt. Generally, if the same or similar communication is directed toward more than one person, it is viewed as an advertisem*nt. To properly supervise IARs, electronic communications must be monitored by the RIA’s Chief Compliance Officer (CCO) or an authorized representative. If an electronic communication is an advertisem*nt, it is subject to the firm’s advertising policies and procedures, which typically require pre-approval before sending.
Firms must supervise covered accounts and personal securities transactions
An RIA’s code of ethics must set forth the standard of conduct to be adhered to by supervised persons. The code should also address conflicts that may arise from personal trading by advisory personnel. An RIA’s CCO is responsible for enforcing the firm’s code of ethics and reviewing trading in covered accounts.
A covered account usually includes any account held in the name of the RIA or an associated person. It also includes an account in which the firm or an associated person:
- Has any direct or indirect beneficial ownership interest;
- Exercises influence or control; or
- Is carried in the name of, or for the direct beneficial interest of, a person related to the individual.
To fulfill their responsibilities, CCOs should review access persons’ personal securities holdings and transaction reports. CCOs must also ensure that those reports are filed and reviewed in a timely manner.
Firms must ensure that the Form ADV Part 2B Supplement and Form U-4 for an IAR is accurate
RIAs must take steps to ensure that the Form U-4 for each IAR is current and accurate. IARs should be required to notify the RIA if their name or address changes.
IARs must disclose any convictions, criminal charges, as well information regarding:
- Regulatory disciplinary actions;
- Civil judicial actions;
- Customer complaints;
- Terminations; and
- Bankruptcies and liens.
Without this information, an IAR’s Form U-4 won’t be accurate.
Firms must supervise IARs’ outside business activities
RIAs must do more than just review questionnaires filled out by their IARs. This is especially true as it relates to outside business activities. Firms should impress upon supervised persons that they must disclose and get approval before engaging in an outside business activity.
Inadequately supervised outside business activity can expose RIAs to lawsuits and regulatory sanctions. Furthermore, when RIAs are unaware of outside business activities, Form ADV and Form U-4 disclosures are likely to be inaccurate. Without accurate information, RIAs will not be able to fully disclose all of their actual and potential conflicts of interest.
Ara Jabrayan is the Managing Member ofRIA Compliance Group, LLC,and on the Advisory Board for SmartRIA. His specialties include SEC and state RIA registrations, ongoing compliance assistance, mock exams, and the development of compliance programs. Follow him onLinkedIn,Facebook, or check out hisBlog.
