Supervision Guidelines for Investment Advisers

PURPOSE: This rule provides guidance for reasonable supervision by investment advisers. (1) The following are factors considered by the commissioner to determine whether any firm with two (2) or more supervised persons has engaged in reasonable supervision. Whether— (A) The firm has established current procedures and systems for supervising the activities of supervised persons that are reasonably designed to achieve compliance with applicable state and federal securities laws and regulations; (B) The firm has established current procedures and systems that could reasonably be expected to allow a chief compliance officer reasonably discharging his/her supervisory duties under such established procedures to prevent and detect violations of the Act, and the firm regularly reviews these procedures and systems; (C) The firm has reasonably implemented the procedures and systems referred to in subsections (A) and (B) above; (D) The firm provides appropriate initial and periodic refresher training to supervised persons regarding the firm’s procedures and systems and additional initial and periodic training to chief compliance officers in the procedures and systems referred to in subsections (A) and (B) above; (E) The firm reasonably follows up on indications of wrongdoing, “red flags.” Such red flags may consist of, but are not limited to, activities of unregistered individuals, outside business activities, making unsuitable recommendations, charging unreasonable advisory fees, misrepresenting the qualifications of the supervised person, improper use of a senior designation, garnishment of wages, regulatory actions, prior disciplinary history of one (1) or more customer complaints, and recent customer complaints; (F) The firm has an adequate system to track and monitor the status of customer complaints; (G) The firm has designated a chief compliance officer of the investment adviser; (H) The designated supervisor is responsible for supervising no more supervised persons at any one (1) time than would allow the supervisor to effectively execute his supervisory duties. The appropriate number of supervised persons which one (1) person can reasonably supervise is dependent on the nature of the business conducted by the persons supervised, technical resources available to the supervisor, additional personnel available to assist the supervisor, and other resources made available to assist the supervisor; (I) The firm conducts annual compliance examinations of supervisory locations with effective deficiency and follow-up procedures. Unannounced examinations may be reasonable if there are compliance issues concerning supervised persons or activities; (J) The firm reasonably audits for compliance including reasonable follow-up and proof, independent of the supervised person, that mail is reviewed for customer complaints and other red flags; and (K) The firm has a reasonable policy for disciplinary and progressive supervisory action, which is reasonably implemented. AUTHORITY: sections 409.4-412(d)(9) and 409.6-605, RSMo Supp. 2010.* Original rule filed April 8, 2004, effective Oct. 30, 2004. Amended: Filed Sept. 9, 2010, effective March 30, 2011. *Original authority: 409.4-412, RSMo 2003 and 409.6-605, RSMo 2003.