NASAA Issues Model Role for Continuity and Succession Planning

On April 13th, the North American Securities Administrators Association (NASAA) issued its model rules for continuity and succession planning. The new rule asks state regulated RIAs to implement continuity and succession plans to protect clients from “key-man” risk – the risk that key personnel at small wealth management firms might suffer death or disability and leave clients unexpectedly fending for themselves. NASAA expects that states will promulgate their own specific rules based on the model rule over the next 12-18 months. That said, NASAA also suggested that the principles in the model rule will likely govern audits even before the official rules are issued at the state level.

The model rule has five simple requirements. They are…
  1. Provide for the protection, back-up and recovery of Advisor’s books and records.
  2. Have a method of communication with customers, employees and regulators.
  3. Provide for office relocation if needed
  4. Provide for responsible persons to act in the event of death or disability of key personnel.
  5. Contain methods to minimize service interruptions and client harm.
What does this mean for me? We have had the opportunity to participate in three panel discussions about the model rule with NASAA since it was released. Several very practical considerations arose during the panel discussions:
  1. Business Entity Structure. Your business entity structure can have a significant impact on what your solution must look like. For example, firms structured as a pure sole proprietor dissolve immediately with the death of the sole proprietor – there may be no business to transfer and there may be some question about who has the authority to access client data and wind-down the business. By contrast, firms structured as an LLC or C-Corp should persist as a business and a continuity/succession plan should therefore be easier to develop. These rules vary state by state so advisors should contact their compliance consultants.
  2. Liquidation or Continuity/Succession Plan. It appears that regulators will find a plan that winds-down the firm equally acceptable as a plan that provides for continuity/succession. Based on the conversations to date, it also appears that the two plans require an equal amount of effort to put in place. Which begs the question: if they require the same effort, why not develop a continuity/succession plan that will (a) better care for your clients and (b) compensate you or your family for the value of your firm?
  3. Handshake Agreements Probably Don’t Count. Most advisors have no continuity or succession plan in place. Those who do often have a “handshake” agreement with a local firm in their study group. These types of agreements typically lack the details and/or the enforceability that may be required by the new rules.
  4. Partners Must Have the Capacity to Absorb Your Firm. Even when advisors put a formal agreement in place with another firm, they often overlook a very practical consideration: when the time comes to absorb your firm, does the acquiring firm have the capacity to handle the all the new clients at once? In many cases, both firms in the agreement are solo practitioners struggling to manage their existing client load and do not have the systems or the team to absorb the new clients without sacrificing service to their own clients or to both sets of clients.
Regardless the path you choose, it would seem continuity and succession planning is graduating from “best practice” status to “regulatory requirement”. We estimate the new rule will cause 13,000 state-regulated RIAs that characterize themselves as financial planners to begin the process of exploring alternatives.

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