NASAA’s Model Rule on Business Continuity and Succession Planning for State Registered Advisers – Do You Have Your Business Continuity and Succession Plan Prepared?

May 27, 2015

The North American Securities Administrators Association, Inc. (“NASAA”) has created a model rule on Business Continuity and Succession Planning (“NASAA Model Rule”) for state registered investment adviser firms.  NASAA’s Model Rule provides guidance to state registered investment advisers when creating Business Continuity and Succession Plans (“BCP”) for their registered investment adviser firms.   The most common purpose of the BCP is to have processes and procedures in place to ensure that critical business functions can continue during and after a disaster or other significant business interruption, whether internal or external.

An investment adviser’s BCP should be customized to the investment adviser’s business model and circumstances. When tailoring the BCP to the specific business, NASAA’s Model Rule requires the investment adviser’s BCP to address the size of the firm, types of services provided, and the number of office locations.  Additionally, the investment adviser’s BCP should include provisions that provide for the back-up of the investment adviser’s books and records; the method that the investment adviser will use to communicate with customers, employees, and regulators in case of a significant business interruption; office relocation in case of damage to or inaccessibility of the current office location; the name of responsible person(s) to act in the event of death or the disability of the investment adviser’s key personnel; and the BCP should contain methods the investment adviser will follow to minimize service interruptions and provide investment advisory clients with access to their funds and securities. One of the key goals for investment advisers when developing their BCP is to limit harm or potential harm to clients.

Planning for an unexpected succession situation is an important part of the BCP.  The necessary succession planning will vary depending on the investment adviser’s business model and the needs of the investment adviser, same as the business continuity planning for disaster recovery.  The succession planning part of an investment adviser’s BCP should be drafted so that it does not conflict with your state’s laws for forming business entities.

The NASAA Model Rule states, “Various states have a state-specific BCP regulatory requirement. State rules may differ from the NASAA Model Rule. Advisers should check with the securities regulators in their home states and with any other states in which they are registered to ascertain specific state requirements.” In order for NASAA’s Model Rule to go into effect in for a particular state, the individual state will need to adopt it but it is highly likely that the majority of states will eventually adopt it. However, it is important to note that NASAA’s Model Rule states, “…states may interpret their regulatory requirements (or an Adviser’s fiduciary duty) to implicitly require BCPs. In the absence of any state-specific requirements, Advisers have a fiduciary duty to have policies and procedures in place that minimize risk to clients and ensure clients’ access to their assets.”

RIA Compliance Consultants strongly recommends that state registered investment advisers review the NASAA Model Rule on Business Continuity and Succession Planning for guidance with making sure the investment adviser has an adequate BCP in place. Investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) should also have a business continuity and succession plan in place. In the final rule release for Rule 206(4)-7, business continuity plans were included in the list of the minimum issues that should be addressed in an investment adviser’s written supervisory policies and procedures. Additionally, in a December 11, 2014 speech regarding, “Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry,” SEC Chair Mary Jo White indicated that the SEC staff is developing a recommendation to require investment advisers to create transition plans to prepare for a major disruption in the investment adviser’s business, which would include the investment adviser’s dissolution or following the departure of key personnel. RIA Compliance Consultants recommends that all registered investment advisers take a proactive approach to developing business continuity and succession plans since it appears that at some point these will be a requirement for all investment advisers.

RIA Compliance Consultants can assist investment advisers with preparing and tailoring a BCP to conform to the individual investment adviser’s business model and circumstances. If you are an existing client of RIA Compliance Consultants, please contact your consultant to discuss how we can assist you. If you have not previously worked with RIA Compliance Consultants, please click here to schedule a time to speak with one of our consultants.

Posted by Bryan Hill
Labels: Business Continuity Plan, Common Deficiencies, Compliance Program