The Financial Industry Regulatory Authority (Finra) has issued a regulatory notice encouraging registered representatives and the 600,000 broker-dealers to have succession plans in place for when firms are sold or reps retire or are no longer able or willing to perform their duties.

The regulator said that it is not mandating succession planning, but used the 31-page notice on Tuesday to underscore the benefits of succession planning and what can go wrong if reps do not have adequate succession plans in place.

The guidance comes as the number of reps approaching age 65 continues to climb. Finra said that at the end of 2021 some 16% of representatives were 60 or older, 8% were 65 and older and nearly 4% were 70 or older.

Finra, a private corporation that acts a self-regulatory organization for the U.S. securities industry, also noted that the pandemic has put the spotlight on succession planning.

"The COVID-19 pandemic and industry demographic trends have spurred greater focus on, and adoption of, succession plans in recent years," Finra said in its guidance.

Strategies Finra wants to see firms and individual reps employ to ensure smooth succession for investors include the following:

• The creation of teams to ensure smooth transitions in the case of departures.
• Agreements to transfer or sell a book of business to another rep inhouse or at another firm.
• The hiring or development of junior reps to take over books of business in the case of an advisor’s incapacity or death.
• Clear communications from reps to firms and customers regarding their official succession plans.
• Signed contingency plans should a rep need to stop working.
• Agreements for a firm to merge or be acquired by another firm.

Small firms in particular need this assistance since the percent of reps at or near retirement age is higher at smaller firms, Finra said. Small firms are defined as firms with one to 150 reps, according to Finra.

“Particularly for small firms and sole proprietorships, a succession plan may involve the sale of a firm,” Finra wrote. “While plan terms and complexity vary, succession plans typically address the sale of a book of business or firm assets or the reassignment of a representative’s customer accounts.”

The regulator said it has observed situations where the founding member and co-owner of a firm unexpectedly died, leaving the remaining co-owner without a succession plan or any guidance on servicing customers. “After trying to continue the business over a year after the co-owner’s death, the firm was not able to hire another representative to continue the business and ceased operations,” Finra said.

Some firms have also implemented a comprehensive approach to address suspected diminished capacity and cognitive decline in reps, including implementing training, formalizing an escalation process to raise concerns relating to cognitive issues by staff and other reps and establishing a "diminished capacity committee" to collectively evaluate these issues and decide on next steps, Finra said.

The regulator also advised firms to be watch out for scam artists who may purchase a book of business to target customers for fraudulent schemes.

Finra also used the notice to remind firms that while it does not require succession plans, it does mandate that broker-dealers create business continuity plans and update them at least annually. The plans are required to spell out the specific steps the firm will take in the case of an emergency or business disruption.