State regulators to require continuity plans

Model rule outlining policies investment advisers should have in place in case of natural disasters or death will need to be adopted by individual states

Apr 22, 2015 @ 1:10 pm

By Mark Schoeff Jr.

State securities regulators have advanced a model rule outlining policies investment advisers should have in place to respond to natural disasters or the death or incapacitation of an executive.

The rule, developed by the North American Securities Administrators Association and approved at the organization's spring conference this month in Washington, requires every adviser adopt written procedures for business continuity and succession planning. It was posted online on Tuesday.

The plan must show how the firm will protect books and records, establish an alternative means of communicating with clients, relocate the office, reassign key personnel and generally minimize disruption to the business.

“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 plan] can result in harm to advisers' clients, exposure to regulatory actions and litigation for failure to satisfy legal, regulatory or contractual duties.”

The rule allows flexibility in the plans. They can vary based on the adviser's size, services and locations. State regulators oversee advisers with less than $100 million in assets under management.

The model rule must be adopted by individual states before going into effect.

Patricia Struck, Wisconsin securities administrator, said there was “quite a lot of enthusiasm” for the model rule among her NASAA colleagues, and she expects they will go home and work to get a similar version approved in their states — as she intends to do. That momentum is aided by the fact that NASAA has already put the rule through a comment process.

“We kind of know what people are thinking,” said Ms. Struck, who led NASAA’s initiative. “Most of the analytical and policy work has been done in advance.”


Following severe weather, such as Hurricane Sandy in 2013, advisory firms for the most part bounce back. But such episodes have prompted regulators to look beyond nature to other possible business disruptions, such as the death of a firm's top executive, said Peter McGratty, vice president for strategic partnerships at Pinnacle Advisor Solutions.

“They realized that there is substantial key-man risk,” Mr. McGratty said. “What if you're the casualty of the hurricane?”

Pinnacle and Advisor Assist will team up with NASAA for upcoming events to explain the rule. They include a panel at a Shareholder Services Group conference on April 24, a Pinnacle webinar on April 30 and a webinar with the Garrett Planning Network on May 6.

The Securities and Exchange Commission is drafting a transition rule that would apply to the approximately 11,500 registered investment advisers under its jurisdiction.

Although there is flexibility in the NASAA rule, Mr. McGratty said advisers should not just set up a business liquidation process.

“As long as you have to make the effort to come up with a plan, you may as well actually do the succession plan,” he said.

Most advisers he talks to acknowledge the need for a succession plan, Mr. McGratty said. They want to meet their fiduciary duty to clients and ensure their operation transitions smoothly if something should happen to them. The problem is they become too busy with daily client demands.

“They're unprepared, based on the conversations I've had,” Mr. McGratty said. “Everybody's intentions are good. At the end of the day, they have a lot on their plate.”


How well developed is your continuity plan?

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