The succession plan should be committed to writing, and is generally set forth in documents such as a buy-sell agreement, shareholders agreement and/or operation agreement, depending upon the specific circumstances. These types of agreements generally dictate future management and ownership transition in the event of death, disability, retirement, regulatory disqualification or otherwise, and will set forth the corresponding terms and conditions of the buy-in or buy-out and the corresponding payment terms. For the advisory firm with one investment professional the task is much more daunting, and may be limited to confirming to clients where the accounts are located and how they may access them. In addition, the advisor could seek to enter a written agreement with another investment advisor, setting forth the terms and conditions pursuant to which a successor advisor would purchase (or simply accept transfer with or without purchase) the client accounts (subject to the required client consent) from the retiring or disabled advisor or from the deceased advisor's estate.
Adequate contingency planning is arguably a necessary component of compliance with Rule 206(4)-7. In light of the fact that each advisory business is different, the initial consideration in any attempt to comply with SEC requirements is to identify those compliance factors that create risk exposure and subsequently to design policies and procedures that address those issues. Of equal importance is assessing the adequacy of any adopted policy and corresponding procedures after their implementation, a natural by-product of which is the retention of records that may assist with future policy revisions and recommendations.
As with all regulatory requirements, it is extremely important to consult with the Advisers Act directly and/or obtain legal counsel competent in this area for the full breadth of requirements and expectations. The investment advisory business has become increasingly more regulated, and it is absolutely imperative that registered investment advisors understand and satisfy their regulatory obligations.
Oren M. Chaplin, esq., is an associate and Thomas D. Giachetti is the chairman of the Securities Practice Group of Stark & Stark, a 100-attorney law firm in Princeton, N.J., and Philadelphia, representing investment advisory firms throughout the United States.