Blog Article

NASAA Passes Rule for RIA Business Continuity and Succession Planning

Apr 22, 2015

An overview of the Model Rule 203(a)-1A or 2002 Rule 411(c)-1A passed by NASAA for investment adviser business continuity and succession planning.

In September 2014, we wrote that many state-registered investment adviser (RIA) firms received an invitation from the North American Securities Administrators Association (NASAA) requesting comments on NASAA’s proposed model rule for business continuity and succession planning. Following that comment period, NASAA has now finalized and released its model rule for RIA firms registered at the state level.

On April 13, 2015, the North American Securities Administrators Association passed its Model Rule on Business Continuity and Succession Planning. Model Rule 203(a)-1A or 2002 Rule 411(c)-1A reads as follows:

Every investment adviser shall establish, implement, and maintain written procedures relating to a Business Continuity and Succession Plan. The plan shall be based upon the facts and circumstances of the investment adviser’s business model including the size of the firm, type(s) of services provided, and the number of locations of the investment adviser. The plan shall provide for at least the following:

1) The protection, backup, and recovery of books and records.
2) Alternate means of communications with customers, key personnel, employees, vendors, service providers (including third-party custodians),and regulators, including, but not limited to, providing notice of a significant business interruption or the death or unavailability of key personnel or other disruptions or cessation of business activities.
3) Office relocation in the event of temporary or permanent loss of a principal place of business.
4) Assignment of duties to qualified responsible persons in the event of the death or unavailability of key personnel.
5) Otherwise minimizing service disruptions and client harm that could result from a sudden significant business interruption.
 

 

In particular, NASAA notes in its commentary that “planning for an unexpected succession situation is an important part of a business continuity plan (BCP).” The commentary then goes on to provide guidance as to how to address an unexpected succession by focusing on these key issues:

  1. Entity type
  2. Designated person
    • The firm should consider whether the individual asked to execute the BCP has the proper expertise and access to key company systems. It’s also important to remember that an individual cannot act as advisor unless they are first properly registered as an investment adviser representative (IAR).  
  3. Service issues
    • It’s important that the succession plan is highly tailored to a firm’s specific business operations and in particular addresses scenarios in which the advisory firm:

NASAA also notes that advisory firms should be thinking through scenarios that are specific risks to the particular firm when planning for sudden business interruptions. Some questions that NASAA suggests should be considered are:

  1. Disaster Recovery
    • What are the specific types of events that may take place?
    • How can such risks be managed?
    • How will employees be trained?
    • How will the BCP be updated?
    • How will the BCP be available to key personnel in and out of primary office?
    • Does the BCP fit the RIA firm’s actual business operations?
    • Is the RIA firm a small firm with unique risks?
    • Does the advisory firm work from a home office?
  2. Loss of Personnel
    1. How will clients be informed?
    2. How does the firm communicate its plan to clients before such an event?
    3. Will the RIA firm continue to service clients or will it shut down?
    4. If the firm is a solo-advisor firm, how will clients be able to access and manage accounts?
    5. Where are assets custodied or located?
    6. If managing a fund, will the fund be liquidated?
    7. How will unearned fees be refunded?
    8. How will the applicable regulator(s) be informed of the plan?

It’s very important to note that each individual state may already have its own separate business continuity plan (BCP) requirement in place or already interpret that it is part of an RIA firm’s fiduciary duty to have a BCP in place. In order for this NASAA model rule to go into effect, each individual state will need to separately adopt it. However, it’s likely that the majority of states will ultimately adopt this NASAA model rule in the near future. As RIA compliance consultants, we highly recommend that all state-registered RIA firms review the full model rule and associated commentary released by NASAA.