Regulators Propose Rule Requiring Succession Plans

You may have vacationed this summer, but your regulators did not!  The North American Securities Administrators Association (NASAA) opened a public comment period running from August 1 to September 30th on a rule that would require financial advisors to put a succession plan in place. Some compliance consultants believe this new rule may be on the fast track and could be finalized before year-end. If so, the rule would be adopted on a state-by-state basis over the course of the next two years. Previously this plan was optional. Soon, it may be mandatory. Stay tuned.

The new rule targets state-regulated advisors (AUM < $100MM) — solo practitioners, in particular — due to the significant disruption to clients that can occur due to the loss of key personnel:

The Guidance is intended to relate and apply more directly to the small or mid-sized adviser. The Guidance discusses issues relating to record keeping and disaster recovery issues, but also focuses on issues most common to small advisers such the loss of key personnel (i.e. succession planning).
The loss of key personnel is especially important considering that a significant subset of state-registered investment advisers tend to be sole proprietorships, single-member LLCs, or similar types of structures. Many firms have a single investment adviser representative. The loss of key personnel in such a firm due to death or other unavailability is not unusual, and can be harmful to clients absent proper planning. For example, the death or disability of a sole investment adviser representative can lead to an immediate cessation of activity with no notification or guidance to the firm’s former clients, who may heavily depend upon the adviser for financial services.  Indeed, the motivation for this rule is that an advisor has a fiduciary duty to clients to put a succession plan in place:

A sudden loss of key personnel is fairly common and does not alleviate an Adviser’s fiduciary duty to its clients or its obligation(s) to comply with regulatory requirements. In creating a Succession Plan, an Adviser should consider how an unexpected loss of key personnel might cause difficulties for the Adviser’s clients. The Succession Plan should address these possible difficulties.

The proposed rule is not limited to the client-facing advisor but to key personnel more broadly.  Based on our conversations this summer with advisors considering a succession plan, the expanded concept is right on point.  The number of advisors who have seen key employees depart unexpectedly during the last nine months is surprising and has caught a number of firms flat footed.  For example, several had their primary investment person depart, leaving no one to manage the money and execute investment operations.  Others have had key operations personnel exit, leaving no one who knows how to handle client administration (i.e. deposits, withdrawals, transfers, client reporting, client billing, etc.).  We have even seen client-facing planners who ran client relationships for advisors who were stepping back from day-to-day activities depart unexpectedly, forcing the owners to return to the daily grind.

For more about Succession Planning, download the ByAllAccounts white paper Seven Ways to Make Your RIA Succession Plan a Success.


comments powered by Disqus