RIAs who are putting off thinking about succession planning may have to get their plans in gear under a proposed regulation that has been introduced by the Securities and Exchange Commission.
If the regulation is approved, it will require advisors to do something they should have been doing already, according to Kurt Nunez, compliance consultant for Core Compliance & Legal Services Inc., a compliance and risk management firm based in San Diego.
“Even new firms should have business continuity and transition plans in place,” Nunez says. “Firms should not wait for the regulation to be put in place to do this. It is a part of best practices.”
The rule, which was proposed in June, is designed to ensure that investment advisors have plans in place to address operational and other risks related to a significant disruption in the advisor’s business in order to minimize client and investor harm, the SEC says.
“While an advisor may not always be able to prevent significant disruptions to its operations, advance planning and preparation can help mitigate the effects of such disruptions and in some cases, minimize the likelihood of their occurrence, which is an objective of this rule,” SEC Chair Mary Jo White said in a written statement.
Business continuity and transition plans would assist advisors in preserving the continuity of advisory services in the event of business disruptions – whether temporary or permanent – such as a natural disaster, cyber-attack, technology failures, the departure of key personnel, and similar events, according to the SEC.
The proposed rule requires advisors to plan for protecting data, arranging alternative work space, and providing continuity if an advisor is unable to continue working. The rule could go into effect sometime next year after a public comment period.
“Continuity is the key word here,” says Nunez. “An advisor or the firm needs to be able to maintain communication with clients, enable clients to have access to their funds, and provide the necessary fiduciary coverage.”
Advisors should be prepared to review their transition plans, a process that should be undertaken annually, along with meet with senior staff to discuss the plan and ensure that the staff has the needed training to carry out the plan, Nunez says.
“Also, clients should know about the plan in advance and know how transitions might affect them,” he added.