Quick Answer
Investment advisers must maintain a written business continuity plan covering disaster recovery, succession, client notification, key personnel, and regulatory communication. The NASAA model rule sets no fixed review cadence (unlike the annual FINRA broker-dealer requirement); the plan is reviewed and updated as circumstances change. Succession planning is especially critical for sole practitioners, who have no automatic backup.
What Elements Must a BCP Include?
| Element | Details |
|---|---|
| Disaster recovery | Procedures for data backup, systems recovery, and alternative office arrangements |
| Succession planning | Plan for continuity of advisory services if the adviser becomes unable to serve (death, incapacity, retirement) |
| Client notification | Procedures for notifying clients of any disruption to advisory services |
| Key personnel | Identification of critical staff and their backup assignments |
| Regulatory communication | Plan for communicating with regulators during a disruption |
Which Advisers Must Have a BCP?
| Adviser type | BCP requirement |
|---|---|
| State-registered investment advisers | Explicitly required in writing under the NASAA model rule |
| SEC-registered (federal covered) investment advisers | Not explicitly required by name. The SEC proposed a dedicated BCP rule in 2016, but it was never adopted. A BCP is expected in practice under the SEC's general compliance-program rule and is a widely followed best practice |
| Broker-dealers | Required under FINRA's broker-dealer business-continuity rule, which also sets the annual review cadence |
"Investment adviser" in this unit's NASAA-rule discussion means a state-registered adviser. Registration status determines which rule, if any, explicitly applies.
Exam Tip: Gotchas
- A question that says "SEC-registered" or "federal covered" adviser is signaling that the state NASAA model rule doesn't apply. Don't assume the same explicit BCP mandate carries over.
How Often Must the Plan Be Reviewed?
- The NASAA model rule sets no fixed review cadence: the adviser reviews, tests, and updates the BCP based on its facts and circumstances
- The plan must be updated after significant business changes (key personnel, vendors, operations, locations)
- Note: the at least annually review requirement comes from the broker-dealer business-continuity rule, which does not govern state investment advisers
Why Is Succession Planning Critical for Sole Practitioners?
Particularly important for sole practitioners who have no automatic succession.
Think of it this way: A sole-practitioner investment adviser (IA) who becomes incapacitated with no succession plan leaves clients unable to access their accounts or receive advice. The adviser's fiduciary duty extends to protecting clients even after the adviser can no longer serve them.
Exam Tip: Gotchas
- A sole-practitioner IA who becomes incapacitated with no succession plan leaves clients locked out. Regulators specifically test awareness that succession planning is a regulatory requirement, not just a best practice.
Can a Named Designee Transfer the Advisory Contracts Without Asking Clients?
No. Naming a capable designee (an attorney, family member, or another adviser) to execute the plan authorizes that person to carry out the plan; it does not let them assign a client's advisory contract to a new adviser without the client's consent.
A designee can be authorized in advance to:
- Access records under a prearranged client authorization to carry out a wind-down
- Notify clients and regulators of the interruption and explain next steps
- Locate unearned prepaid fees and arrange prompt refunds
Transferring the advisory relationship itself is different: it always needs the client's consent, no matter how capable or well-authorized the designee is.
Exam Tip: Gotchas
- Don't confuse notifying clients with transferring their contracts. A plan can always authorize a designee to tell clients the adviser is unavailable; it can never authorize the designee to reassign their advisory contract without their consent. See Client Contracts for the full no-assignment-without-consent rule.
What Should You Check on Exam Day?
- Investment advisers must maintain a written business continuity plan (BCP)
- Required elements: disaster recovery, succession planning, client notification, key personnel identification, and regulatory communication
- The NASAA model rule sets no fixed review cadence; the adviser reviews, tests, and updates based on facts and circumstances
- The plan must be updated after significant business changes (key personnel, vendors, operations, locations)
- The "at least annually" review requirement is a FINRA broker-dealer rule, not a state IA requirement
- SEC-registered (federal covered) advisers are not covered by the NASAA model rule: a BCP is a best practice for them, not an explicit rule requirement (a 2016 SEC proposal to require one was never adopted)
- Succession planning is especially critical for sole practitioners, who have no automatic succession
- A sole practitioner's fiduciary duty extends to protecting clients even after the adviser can no longer serve them
- A named designee can be authorized in advance to access records, notify clients and regulators, and refund prepaid fees, but can never assign a client's advisory contract to a new adviser without that client's consent