Got a Succession Plan? State Regulators May Soon Require It

Register now

Advisors registered with state authorities may soon be required to put in place formal business-continuity and succession plans. NASAA, the association of state securities regulators, has published a model rule that would compel advisors to develop plans covering issues like backing up books and records and putting in place an alternate communications plan to reach customers, employees and others in the event of a major disruption at the firm, such as a natural disaster or the death of a principal.


NASAA's model rule is just that -- a template that the association puts out for state securities administrators or legislatures to consider.

So while adoption is by no means assured, Patricia Struck, the Wisconsin securities administrator who led the development of the model rule, believes that many states will welcome NASAA's framework as a means to iron out the inconsistencies that examiners have been observing in the field.

"I am confident that we're going to see states embrace it," Struck says in an interview. "I think we can kind of expect that states will adopt this because they want to have a standard in place when they go out and do their exams."

Struck explains that the push for a model began in earnest a few years ago amid a spate of natural disasters, particularly Hurricane Sandy in 2012, after examiners began reporting that many advisors didn't have contingency plans in place to ensure the continuity of their businesses.

"Most state rules are in response to experiences examiners have when they go out into the field," she says. "It was around the time when we were experiencing natural disasters like that, floods and things like that."

Duane Thompson, senior policy analyst at the fiduciary training firm fi360, also anticipates that many states are likely to be receptive to NASAA's latest proposal, citing the favorable response to NASAA's work on model rules concerning exam waivers and the use of professional designations suggesting a specialization in working with older clients.

"I would say that the track record for the states adopting a NASAA model rule has increased significantly in recent years," Thompson says.

"So I would think that you will see broad adoption over the next couple of years of the rule," he adds. "It shouldn't be controversial, since it makes good business sense to develop succession plans, and particularly so as investment fiduciaries."


NASAA cast a broad net in its proposal, outlining a framework that would require state-registered advisors to consider how they would respond to any number of disruptions.

"Business interruptions take a variety of forms," NASAA said in its call for comment on the proposal. "While interruptions may result from natural disasters or other unexpected events that affect a large geographic region (such as Hurricane Sandy in October 2012), state securities regulators also see business interruptions that result from more localized disruptions to an advisory practice, such as fire, localized flooding, or disability or other unavailability of key personnel, including death."

Importantly, NASAA stipulates that its guidance "is not intended for business continuity and succession that occurs in the regular course of business. It is intended for business continuity and succession planning in unexpected or unusual instances."

At a minimum, NASAA's model rule would require advisors to have a plan for protecting, backing up and recovering books and records. The communications provisions call for a predetermined system for notifying customers, regulators, employees and vendors about a significant business interruption. Advisors would also be expected to make plans for relocating the firm's office in the event of a disaster.

Additionally, a succession plan would stipulate which personnel would assume key responsibilities at the firm should senior leaders die or become incapacitated.

NASAA formally adopted the model rule last Monday at its public policy conference, and published the proposal on its website this week.


Looking ahead, Struck says that NASAA intends to serve as a resource to help explain the contours of the rule to members through a series of planned seminars, webinars and other outreach efforts.

Struck says that the rule did not change substantively through the course of the comment period, though many parties expressed alarm at the succession planning provisions of the proposal. "The concern was we were being a little too overbearing," she says.

In response, NASAA did not water down the provisions, but instead offered more detailed guidance regarding succession planning in its final rule, enumerating the distinct considerations that firms should weigh, including the business structure (sole proprietorship, S corporation, etc.), the services offered, and who should be named as a designated person to assume responsibilities of the practice.

The issues in NASAA's model rule won't be entirely new ground to advisors, but Struck explains that many practices haven't taken the important step of adopting formal policies and procedures, particularly those registered at the state level, generally capped at under $100 million in AUM.

"I think a lot of them have thought about it and a lot of them have sort of informal plans," she says. "I think a lot haven't formalized them."

Kenneth Corbin is a Financial Planning contributing writer in Washington.

Read more:

For reprint and licensing requests for this article, click here.
Practice management Financial planning RIAs Compliance Law and regulation