Monday, August 04, 2014

NASAA Proposes Model Rule on IA Business Continuity

[This story previously appeared in Securities Regulation Daily.]

By John M. Jascob, J.D.

NASAA has requested public comments on a proposed model rule concerning business continuity and succession planning for investment advisers. The proposal seeks to ensure that smaller advisers fulfill their responsibilities under state securities laws to maintain business continuity, protect clients from interruptions in an investment adviser’s business, and mitigate client harm in the event of a significant business interruption.

Background. The proposal notes that state securities regulators regularly witness the importance of proper business continuity and succession planning in their communities. While business interruptions may result from natural disasters such as Hurricane Sandy that affect a large geographic region, business interruptions to an advisory practice may also result from more localized events, such as fire or localized flooding, or from the death, disability or other unavailability of key personnel. Issues concerning succession planning are particularly important for advisers functioning as sole proprietorships or single-member LLCs because the death or disability of a sole investment adviser representative can lead to an immediate cessation of activity with no notification or guidance to the firm’s former clients, who may heavily depend upon the adviser for financial services.

Proposed Model Rule. The proposal includes general rules under both the Uniform Securities Act of 1956 and the Uniform Securities Act of 2002 with respect to business continuity and succession planning. Given the wide range of business models operating in different jurisdictions, NASAA believes that a very specific, prescriptive rules-based approach may not apply equally to each state-registered investment adviser. For example, procedures may differ dramatically depending upon the size and number of locations from which the investment adviser operates. Despite the differences in operations, however, NASAA believes that a broad rule is necessary to require some sort of business continuity and succession plan, and that every plan should include certain general elements.

Proposed Model Guidance. The proposal also includes Model Guidance which is intended to be considered in conjunction with the proposed model rule. The guidance covers a variety of issues that should be considered by investment advisers in developing their own business continuity and succession plan, focusing on the issues unique to smaller businesses and the risks associated therewith. The Model Guidance is broad and is designed to allow investment advisers to tailor their business continuity and succession plans in a manner cost-effective to their business models.

The Model Guidance discusses issues relating to recordkeeping and disaster recovery issues, but also focuses on issues most common to small advisers such the loss of key personnel. The guidance does not prefer any one method of dealing with these potential issues, but raises specific issues based on state securities regulators’ collective experience so that advisers can consider those possibilities in developing their own plan.

Request for comments. The public comment period will remain open from August 1, 2014, until October 1, 2014. NASAA has requested that comments be sent to Patricia Struck, Chair of NASAA’s Investment Adviser Section, and A. Valerie Mirko of the NASAA Legal Department at the addresses specified in the proposal.