Succession Planning Is Not Just for Retirement: FINRA Execs

Succession planning is not just for retirement, with firms implementing such plans for a variety of reasons, executives at the Financial Industry Regulatory Authority said on a recent FINRA podcast.

“It’s important to remember that the benefits of proactive succession planning are not limited to any particular age group,” said Jeanette Wingler, a special assistant to FINRA CEO Robert Cook, and a former associate general counsel in FINRA’s Office of General Counsel, on the FINRA Unscripted podcast episode Preparing for the Unexpected: The Ins and Outs of the Value of Succession Planning.

Succession planning, Wingler said, “can come into play for expected and unexpected events like death and disability,” and “a number of firms offer catastrophe or contingency plans to cover a wide range of events.”

The FINRA Unscripted webcast was a follow-up to a Regulatory Notice released in November emphasizing the importance of succession planning. The notice pointed to the increasing number of representatives who are at or approaching the traditional retirement age of 65.

“One of the most interesting things about this topic is just the breadth and the variety of succession plans that we were able to learn about through our engagement with the industry,” added Elena Schlickenmaier, a member of FINRA’s Strategic Research and Analysis Group.

“There’s a lot of compliance areas where what you see is relatively consistent across firm grouping or firm business model or even firm size. But here there are as many flavors as there are firms,” Schlickenmaier said.

Examples of succession plans include “retirement plans, legacy plans, transition plans, accession plans,” she added, noting the range of names used and the variety of models, “many of which have formal elements and informal elements. Some are purely internal. Some have an external component where there’s support or infrastructure to facilitate a sale of a rep’s practice to another firm or another rep.”

Succession planning is also a topic “that is of great interest to small firms and sole proprietorships,” Schlickenmaier said, “where not having a succession plan may mean that the firm stops operation or requires the sale of that firm.”

Legal Aspects of Succession Planning

While FINRA rules don’t require firms or reps to adopt formal succession plans, “succession planning can intersect with several legal and regulatory areas,” Wingler explained.

The Notice from November “is a resource and doesn’t create new legal or regulatory requirements or new interpretations of existing requirements,” Wingler stated, adding that “member firms are required to adopt business continuity plans, and that’s our Rule 4370.”

A rep’s incapacity or death “could be an emergency or a significant business disruption that triggers the firm’s BCP,” Wingler notes. “So, this is more likely to occur if the firm is a sole proprietorship or has a small number of registered persons.”

Also, as to FINRA’s Membership Application Program, a broker-dealer’s succession plan “may involve the MAP rules and there could be a requirement to file a Continuing Membership Application or engage in a materiality consultation,” Wingler explained.

So, for example, “a change in ownership could trigger an obligation for a firm to file a CMA with FINRA. This is why we really encourage firms to have open dialogues with their FINRA risk monitoring analysts about their succession plans,” Wingler said.

Firms’ internal succession planning programs “may incorporate agreements to pay continuing commissions to retiring representatives,” Wingler added, and “these plans need to be consistent with the federal securities laws and FINRA rules.”

In particular, Wingler called out FINRA Rule 2040, Payments to Unregistered Persons, as well as a series of prior No Action Letters from the Securities and Exchange Commission “that address how member firms can pay transaction-based compensation via continuing commissions to retiring representatives after they cease to be associated with the firms.”