State-registered advisors should act now to prepare for upcoming new rules by the North American Securities Administrators Association requiring them to have business continuity and succession plans in place.
The comment period on NASAA’s proposed model rules expires Oct. 1.
Patty Struck, chairwoman of the securities division for NASAA, told attendees on a Tuesday webinar held by Pinnacle Advisor Solutions called “What Could New Succession Plan Rules Mean for You?” that the new rules will not be “prescriptive, but broad,” and will require investment advisors to create and implement written procedures to address business continuity and succession planning under the Uniform Securities Act of 1956 and under the Uniform Securities Act of 2002.
Struck said that NASAA’s proposed rules, which were released “after a year of development,” address the “unique challenges” that the aging of the advisor work force as well as investors present. Advisors, she said, can become incapacitated for various reasons, “but the advisor still has fiduciary duties that survive their incapacities.”
Some states already require that advisors have business continuity and succession plans, Struck said, adding that the new NASAA rules will create “consistency” among the states.
Once the comment period expires, Struck said that NASAA will take the “final product,” which may or may not include amendments, and consider adopting a final rule in the spring. State legislatures or state securities regulators will then look to adopting the model rule “probably through calendar year 2015.”
The proposal includes a model framework that would require that advisors create and implement a business continuity/succession plan that covers a variety of topics, including the protection, backup and recovery of books and records. Advisors would also have to establish alternate means of communications with customers, key personnel, employees, vendors, service providers (including third-party custodians) and regulators (including but not limited to providing notice of a significant business interruption or the death or unavailability of key personnel). In addition, advisors would have to set up an alternate office location in the event of a loss of a principal place of business as well as assign duties to qualified persons in the event of death or unavailability of key personnel.
Struck, along with Chris Winn, founder and CEO of AdvisorAssist, noted on the webinar the importance of succession plans for small advisory firms and sole proprietors.
Winn told advisors to “get started” on such plans now, and to first “inventory the risks inherent in their specific practice.” For instance, “if it’s a solo firm, is there spouse or child, someone that can step in in some way to assist and facilitate everything” should something happen to the advisor?
Advisors, he said, “do have a fiduciary duty to ensure our clients are taken care of,” he said, adding that in some states an advisor’s practice would cease to exist if the advisor died.
“My key point is that you need to look at the risks and where do I get started, who can assist me in starting a plan, and then work on optimizing that plan,” Winn said.
Peter McGratty, CFA and vice president of strategic partnerships at Pinnacle, noted on the webinar that the majority of firms with less than $100 million in assets under management are small practitioners and small ensembles. “For the solo practitioner [having a succession plan is] of particular importance because there’s no one to hand it off to.”
Michael Kitces, director of research at Pinnacle, questioned whether one succession planning solution could be hiring a junior advisor.
Struck agreed, stating that a junior advisor is a “good example of one kind of succession plan.” She noted another succession plan that a firm examined by a state securities regulator a few weeks ago had in place. The 71-year-old advisor had arranged for a younger advisor whose shop was close by to take over his business, and vice versa; the two advisors had agreed to be “back-ups for one another.”
Struck noted that adequate disclosure would need to be provided to the clients and that each firm would need to check its client contracts in order to proceed with such an arrangement.
Kitces questioned if state regulators would probe to ensure that advisors’ succession plans can actually be implemented.
Struck responded: “That’s exactly the way we’re looking at it.”
Once the rules are in place, she added, exams will not be “significantly different” from what they are now, “but we will look at the NASAA guidance and go through the plan with the advisor.”
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