State and federal examiners increasingly expect advisors to have a business continuity and succession plan in place, even if they aren't bound by a specific rule mandating a formal policy.
So argues Patricia Struck, the Wisconsin securities administrator who led the development of a model rule recently approved by NASAA, the association of state securities regulators.
Struck spoke Thursday in an online presentation organized by Pinnacle Advisory Group, explaining that the model rule is intended to create a uniform standard for advisors regardless of which state they operate in. However, she said advisors shouldn't wait for their state to adopt the regulation to develop their own plans for keeping the business going and communicating with clients in the event of a natural disaster or the death or incapacitation of a principal at the firm.
"This is the kind of discussion ... that we would bring up when we do exams," Struck says. "And we would expect, even though the law hasn't been adopted as a rule in Wisconsin, for advisors to take into account all of the succession planning and business continuity plans generally. And we'd expect them to be conversant in these concepts. Although it's not an enforcement issue -- it's simply a compliance issue at this point."
And it's not just a concern for state officials, as the SEC also has been looking at succession planning and continuity issues for advisors. Christopher Winn, managing principal at the consultancy AdvisorAssist, anticipates that the commission could soon produce guidance for how registrants should craft their plans. Further, he says that, just as at the state level, they shouldn't wait for a regulatory mandate to adopt what he considers a best practice.
"Whether SEC or state, this is likely going to be a deficiency," Winn says. "This will come back in the report as a comment even if a rule hasn't been put in place."
Struck explains that the push for the formal rule that NASAA is urging states to adopt came in response to reports from examiners that many of the practices they visited had no formal procedures in place to keep the business going in the event of an unexpected disruption.
"Part of this was driven by what our examiners were finding in the field over the last several years," she says.
"They're not necessarily common occurrences, but they happen, and they're things that people are reporting," Struck adds. "For example, disruptions caused by natural events. And you don't need to look beyond, say, in Nepal, the earthquake, and people who were hiking Mount Everest. There may not have been any investment advisors, but I know people from my community, Madison, who were over there climbing the mountain. And they're okay, but they weren't expecting to be out of the office quite as long as they're going to be. What happens in that case?"
Or what happens with the advisor who works out of an office in Baltimore, where parts of the city were overtaken by riots this week?
Struck also urges advisors to consider issues around cybersecurity when they're developing their business continuity plans.
NASAA's model rule includes five core provisions that would be required in any business continuity and succession plan, and then a lengthy section of guidance on how firms of different sizes and business models might tailor the rule to their practice.
Those five areas are:
1. The protection, backup, and recovery of books and records.
2. Alternate means of communications with customers, key personnel, employees, vendors, service providers (including third-party custodians), and regulators. This would include providing a notice of a significant business interruption or the death or unavailability of key personnel or other disruptions or cessation of business activities.
3. Office relocation in the event of temporary or permanent loss of a principal place of business.
4. Assignment of duties to qualified responsible people in the event of the death or unavailability of key personnel.
5. Otherwise minimizing service disruptions and client harm that could result from a sudden significant business interruption.
Succession planning can be especially important for sole practitioners, particularly when it comes to designating a qualified person to handle the accounts, or, if need be, the dissolution of the firm. But experts note that simply having a plan in place isn't enough, and could be of little use if advisors don't have a provision to communicate with their clients.
"I can think of a few that I know who truly work as solos -- they don't have any staff at all," says Michael Kitces, Pinnacle's director of research and a contributing columnist with Financial-Planning. "And if something happens to them, like getting hit by the proverbial bus, no one would know. Clients might not know for days or weeks or even months that no one's there at the helm of the ship watching their portfolio anymore."
Struck says that the next phase of her work on the business continuity and succession proposal will be reaching out to states to promote the model rule. That effort, she says, will aim to "make sure that states are adopting it with the objective that it will be the same rule in every state, so that an advisor who's doing business across state lines really doesn't have to worry that they're having to deal with different requirements in different states."
In the meantime, she reiterates her call for advisors not to wait for authorities to take action to make a plan. She argues that advisors acting under their fiduciary responsibilities to their clients should already have a contingency plan in place, and cautions that examiners will ask about it when they visit a practice.
"Be ready to talk about it, because that is something that . we're going to be looking at, and if you don't have it and you haven't thought about it, then that is something that we're going to be noting in an exam report," she says. "You should have thought about it."
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