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New NASAA Rules Require Written Succession Plans

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May 6th 2015
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Deaths, sudden losses of key people, serious illnesses, and natural or other disasters can wreak havoc on advisory firms and their clients, and according to new rules, written succession plans need to be in place to offset such events.

The North American Securities Administrators Association’s (NASAA) new model rule for business continuity and succession planning by state-registered investment advisers now requires written procedures. Specifically, the guidance was developed by the NASAA’s Investment Adviser Regulatory Policy and Review Project Group.

While any plan will have to be tailored to advisers’ specific business needs, these five points should be covered:

  1. Protection, backup, and recovery of records and books.
  2. Communication with everyone involved with the business – from clients to vendors and regulators – about the business interruption, loss of certain people, or other impacts.
  3. New office location, if necessary.
  4. Reassignment of responsibilities if key personnel are lost.
  5. Other tactics necessary to make client and business disruptions as minimal as possible.

This is no casual exercise. The model rule is written according to Section 203 of the Uniform Securities Act of 1956 and Section 411 of the Uniform Securities Act of 2002, particularly the recordkeeping sections. What’s more, model rule adherence is part of an adviser’s fiduciary duties, according to sections 102 and 502 of the two laws, respectively.

“Advisers face significant risks if they become unable to serve clients, either temporarily or permanently,” the rule states. “Failing to address these risks with a [business continuity and succession plan] can result in harm to advisers’ clients, exposure to regulatory actions, and litigation for failure to satisfy legal, regulatory, or contractual duties.”

Remember, too, that states can have specific succession-planning requirements that may differ from the NASAA model rule. States’ requirements also only may imply the necessity for a plan, so keep in mind the fiduciary duty to reduce risks to clients.

So let’s look at a theoretical situation in an example posited by the NASAA in the model rule:

Adviser Mary Smith’s sole proprietorship, Mary’s Wealth Management, primarily manages accounts for older clients on a discretionary basis. Fees are collected quarterly in advance and deposited in a checking account owned jointly with her husband, Henry.

Mary and Henry also co-own a three-office building, and Mary is the sole lessor for the two, two-year leases for which tenants paid rent six months in advance. The rent payments went into the joint checking account, and Mary used her business credit card to buy office supplies.

Mary is killed in a car accident a week before the new quarter begins. Henry becomes the sole owner of the checking account and building. He had not notified clients or state regulators of Mary’s death, removes the office supplies, and puts the building up for sale over the objections of two tenants. He also defaults on Mary’s credit card, and creditors file claims against her estate. Mary’s clients also file claims to recover unearned fees but they are unsecured creditors.

The biggest takeaway? Mary should have had a business continuity and succession plan. Planning also would have provided for client and state notifications. A limited liability company or C corporation, the handling of fee collections and refunds, and a transition of clients to another adviser also could have been considered.

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