Investment Adviser Representative Supervision

Lesson

Investment advisers ' supervision of Investment Adviser Representatives (IARs) covers their responsibilities in ensuring that their IARs comply with all applicable laws, regulations, and ethical standards. This includes establishing and maintaining written policies and procedures, conducting regular reviews of IAR activities, and taking appropriate action when violations are discovered.

Practice Question #1

Which of the following is a responsibility of investment advisers in supervising their Investment Adviser Representatives (IARs)?

A) Ensuring IARs pass the Series 7 exam

B) Establishing written policies and procedures

C) Overseeing the activities of broker-dealers

D) Registering with the Securities and Exchange Commission (SEC)

Select an option above to see an explanation here.

A) The Series 7 exam is for registered representatives, not IARs. B) Investment advisers are responsible for establishing written policies and procedures to govern the conduct of their IARs. C) Investment advisers do not oversee broker-dealers. D) Registration with the SEC is a requirement for certain investment advisers, not a supervisory responsibility.

Terms

Investment Adviser Representative (IAR):: An individual who provides investment advice on behalf of an investment adviser.
Supervision:: The process of overseeing and managing the activities of IARs to ensure compliance with laws, regulations, and ethical standards.
Written policies and procedures:: Formal guidelines established by investment advisers to govern the conduct of their IARs.

Practice Question #2

What is the primary difference between a state-registered adviser and a federal covered adviser?

A) The types of clients they serve

B) The regulatory authority they are registered with

C) The fiduciary duty they owe to clients

D) The supervision requirements for their IARs

Select an option above to see an explanation here.

A) Both state-registered and federal-covered advisers serve a variety of clients. B) State-registered advisers are registered with state securities regulators, while federal-covered advisers are registered with the SEC. C) Both types of advisers owe a fiduciary duty to their clients. D) Both types of advisers are subject to supervision requirements for their IARs.

Historical Example

In the early 2000s, a major investment advisory firm was found to have inadequate supervision of its IARs, resulting in widespread violations of securities laws and regulations. The firm was ultimately fined millions of dollars by regulatory authorities and was required to implement significant changes to its supervisory practices.

Practice Question #3

Which of the following actions might an investment adviser take in response to a violation by one of its IARs?

A) Ignoring the violation

B) Terminating the IAR

C) Reducing the IAR's commission rate

D) Encouraging the IAR to switch to a broker-dealer

Select an option above to see an explanation here.

A) Ignoring a violation is inappropriate and could result in further regulatory action. B) Terminating the IAR is one possible action an investment adviser might take in response to a violation. C) Reducing the IAR's commission rate may not address the underlying issue and could harm clients. D) Encouraging the IAR to switch to a broker-dealer does not address the violation or protect clients.

Real-World Example

An investment adviser discovers that one of its IARs has recommended unsuitable investments to clients to generate higher commissions. The adviser immediately addresses the violation, including terminating the IAR, compensating affected clients, and strengthening its policies and procedures to prevent future occurrences.