RIA Compliance and Practice Management Blog

Proposed RIA model rule for Business Continuity & Succession Planning

Posted by RIA in a Box

Sep 13, 2014 10:44:00 AM

Many registered investment adviser (RIA) firms registered at the state level recently received an invitation from the North American Securities Administrators Association, Inc. (NASAA) requesting comments on the NASAA  Proposed Model Rule for Business Continuity and Succession Planning. The model rule proposal, once formulated, will be passed along to each individual state for possible adoption through its own legislative process. There is no guarantee that all states will adopt the rule and the process may take years. However, based on past history, it’s likely that a good majority of states will ultimately pass the NASAA model rule and as such, all state-registered investment advisory firms are strongly encouraged to review the proposed model rule.

This public commentary is a great opportunity for individual RIA firms to help shape future legislation. This effort allows RIA firms to help steer the industry away from being required to follow a rule they feel is onerous or overly financially burdensome. As RIA compliance consultants, we believe this is a great opportunity for the over 20,000 state-registered investment advisory firms to play an active role in future RIA regulation. Some questions to consider when commenting include:

  1. Should the model rule should be more specific, or incorporate any specific provisions not currently considered?
  2. Has your firm encountered any specific business continuity/succession plan issues not currently covered or adequately addressed by the Guidance?
  3. Should the Guidance be modified in any particular way?

The proposed Business Continuity segment of the Model Rule calls for a written procedure centered on five points (at a minimum). When implemented, the procedures would allow an RIA firm to continue operating during a temporary or significant business interruption. Examples of this could range from floods, tornadoes, and hurricanes to the unexpected death of key personnel.Download our free white paper: RIA Systems and Operational Best Practices

Succession Planning is the second section of the proposed Model Rule. Appropriate succession planning can allow the business to continue in the event of a sudden loss of key personnel. This event is fairly common and it is particularly relevant to the investment adviser industry given the large number of firms with a single owner-operator. For reference, Meridian-IQ estimates that over half of all registered investment adviser firms, approximately 16,500 firms in total, are owned and managed by a single principal. By that, it is inferred that there is a single investment adviser representative (IAR) at the investment adviser firm.

Any solo principal that has built up a significant RIA business over time and has individuals in his or her life that the principal would like to receive some benefit from the enterprise value the business has created should consider providing comments on the succession planning section. As the model rule notes, there are several succession planning obstacles and proper planning is required to overcome them.

When considering the business continuity plan model rule, it is important keep in mind that a viable solution is already widely practiced in the investment adviser community: having the ability to conduct business from any location in the United States (and perhaps elsewhere) via wireless communications and internet connectivity. Many RIA firms today are moving to a paperless office environment in which they can conduct business and access client accounts via CRM systems and their custodial platforms through wireless internet connectivity. Additionally, the availability of cloud technology and other web-based systems is a strongly recommended solution for books and records storage and access.

Overall, the proposed NASAA model rule has been designed thoughtfully. The NASAA Board of Directors and the Investment Adviser Section should be commended for their efforts. The public comment period is currently active and ongoing until October 1, 2014. That means less than 3 weeks remain to provide your feedback in setting future RIA compliance and regulatory rules for state registered investment advisory firms.

On the topic of business continuity plans, the chief compliance officer (CCO) of all investment adviser firms should also check out the guidance issued by the SEC in August of 2013

Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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