SEC works on rule requiring practice transition plans

The regulator wants advisers to develop continuity plans to avoid major disruptions to clients and markets

Dec 11, 2014 @ 2:46 pm

By Mark Schoeff Jr. and Liz Skinner

Financial advisers could be forced by federal and state regulators to create transition plans in the event they die or become incapacitated.

Last Thursday, Securities and Exchange Commission Chairman Mary Jo White said the agency is focusing on how investors are affected during times when their adviser is unable to serve them.

“The staff is developing a recommendation to require investment advisers to create transition plans to prepare for a major disruption in their business,” Ms. White said in a speech for an event in New York sponsored by the New York Times. “The process of creating such a plan in advance of an actual severe disruption in the adviser's operations could better prepare advisers and their clients to deal with a transition and its attendant risks if one were required.”

The transition rule is on the SEC's regulatory calendar for a proposal in October. It's one of the steps the SEC is taking to address both portfolio and operational risks in the asset management industry.

State regulators also are working on a business continuity rule for financial advisers they oversee.

The concern among regulators is a wake-up call for advisers to put together transition plans, said Peter McGratty, vice president for strategic partnerships at Pinnacle Advisor Solutions.

“We're all very busy and sometimes it slips to the bottom of the to-do list because no one expects to get hit by a bus tomorrow,” Mr. McGratty said. “Now [advisers] have a reason why it has to be done now. This will move it up the priority list.”

The comment period for the model rule on continuity planning that the North American Securities Administrators Association is drafting closed Nov. 1. The group is expected to vote on the proposal at its spring meeting in April.

“We think that preparing for the unexpected is so important,” said Patricia Struck, Wisconsin securities administrator. “What happens to your clients? Be ready for that.”

The feedback NASAA is getting from advisers centers not on what to do when natural disasters hit but rather how to plan for life transitions.

“The point they really want to talk about is not business continuity but succession planning,” Ms. Struck said.

But before delving into long-term planning, making sure clients are taken care of in the short term should a catastrophe strike is critical.

“It's certainly a need and something everyone should have,” said Dan Candura, founder of PennyTree Advisers. “But as we've learned, trying to pull one together — it's not easy to do.”

Mr. Candura, who has been diagnosed with inoperable prostate cancer, said he's talking with several individuals about different aspects of a continuity plan. His clients, whom he told of his condition in a blog post in January, are his top priority.

“I'm looking for the right individual to serve my clients and take care of them appropriately,” Mr. Candura said. “It's like courting.”

The SEC's notice about taking action on this issue comes just five months after InvestmentNews told of Mr. Candura's story as part of an article on the urgent nature of continuity planning.

Advisers encourage clients to arrange their finances all the way to the end of their lives. The practitioners should take the same holistic view, said Brian Lauzon, managing principal of AdvisorAssist, a compliance and management consultant for advisers.

“It's completely consistent with the types of planning that advisers recommend their clients do: accepting and planning for your mortality,” Mr. Lauzon said.

The situation is especially serious when a solo adviser is unable to work or dies, Mr. Lauzon said.

The problem goes beyond a client not being able to call and get personal advice about a financial concern, he said. Without a licensed professional, the client's accounts can't be accessed and investments can't immediately be rebalanced or sold.

An adviser who's looking for someone to serve as the solution in such an emergency or death may want to see if their custodian can introduce them to any like -minded professionals, Mr. Lauzon said.

Financial advisers already are required by the SEC to have plans in place should business operations be disrupted by an emergency, such as a hurricane or other storm. In August 2013, the commission issued a risk alert to advisers asking them to reconsider those plans to shorten recovery time. That alert was the result of 40 adviser examinations the SEC staff conducted after superstorm Sandy.

As it works on its transition rule, the SEC should be flexible in how it allows advisers to set up continuity plans because every situation is different, said Mr. Candura, who leads about 50 adviser ethics webinars and seminars each year.

Advisers often make several attempts to find the right solution before they find the one that works for them, he said.

“It's not easy to do and it's not quick to do,” Mr. Candura said. “It's like quitting smoking.”

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