Investment Advisers Act: Supervised Persons

The Investment Advisers Act of 1940 (the “Advisers Act”) is a cornerstone of investment advisory regulation in the United States. A key concept within the Advisers Act is that of a “supervised person.” Understanding who qualifies as a supervised person and their associated responsibilities is crucial for both Registered Investment Advisers (RIAs) and individuals operating within the investment advisory industry.

Essentially, a supervised person is any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or any other person who provides investment advice on behalf of the investment adviser and is subject to the adviser’s supervision and control. This definition is deliberately broad to encompass a wide range of individuals who may influence or execute investment decisions.

The responsibilities of a supervised person are primarily determined by the RIA’s supervisory policies and procedures. The Advisers Act places the onus on the investment adviser to have a robust supervisory framework. This framework aims to prevent violations of securities laws and ensure that clients receive suitable advice. Consequently, supervised persons must adhere to these policies and procedures.

Here’s a breakdown of key responsibilities of a supervised person:

• Compliance with Policies and Procedures: Supervised persons must thoroughly understand and strictly adhere to the RIA’s compliance manual, code of ethics, and other internal policies. This includes policies related to trading practices, client communication, privacy, and conflicts of interest.
• Suitability of Advice: Supervised persons providing investment advice must ensure that the advice is suitable for the client’s individual needs, financial situation, and investment objectives. This requires gathering sufficient information about the client and understanding their risk tolerance.
• Disclosure of Conflicts of Interest: Supervised persons must promptly disclose any conflicts of interest to clients. This includes any financial interests they may have in recommended investments or any relationships they have that could potentially influence their advice.
• Accurate Recordkeeping: Supervised persons are often responsible for maintaining accurate records of client interactions, investment recommendations, and trading activities. These records are essential for compliance audits and investigations.
• Reporting of Violations: Supervised persons have a responsibility to report any suspected violations of securities laws or the RIA’s policies and procedures to the appropriate compliance personnel within the firm. This is crucial for maintaining a culture of compliance.
• Training and Education: Supervised persons must participate in ongoing training and education to stay informed about changes in regulations and best practices in the investment advisory industry.

The RIA is ultimately responsible for the actions of its supervised persons. If a supervised person violates securities laws or fails to adhere to the firm’s policies and procedures, the RIA may be held liable. Therefore, effective supervision is not just a compliance requirement; it is also a crucial risk management strategy for RIAs.

In conclusion, the concept of a supervised person is integral to the regulatory framework established by the Investment Advisers Act. Supervised persons play a vital role in delivering investment advice to clients and upholding the integrity of the investment advisory profession. By understanding their responsibilities and adhering to the RIA’s policies and procedures, supervised persons contribute to a strong compliance culture and help protect the interests of investors.