Business Continuity Plans
The final piece of the ethical framework addresses what happens when things go wrong, not ethically, but operationally. A natural disaster, cyberattack, or the death of a key principal can disrupt client service. Regulators expect advisers to plan for these scenarios in advance.
NASAA Model Rule 203(a)-1
NASAA Model Rule on Business Continuity and Succession Planning requires state-registered investment advisers to establish, implement, and maintain written business continuity plans (BCPs).
The plan must be based on the facts and circumstances of the adviser's business, including:
- Size of the firm
- Types of services provided
- Number of office locations
Exam Tip: Gotchas
- NASAA Model Rule 203(a)-1 applies to state-registered advisers only. Federal-covered advisers follow SEC requirements instead.
Required BCP Elements
A business continuity plan must address:
| Element | Purpose |
|---|---|
| Protection and recovery of books and records | Backup systems to ensure records survive a disruption |
| Alternate communications | Backup methods for reaching clients, employees, and regulators |
| Office relocation | Plan for operating if the primary site is unavailable |
| Assignment of duties | Who handles responsibilities if key personnel are incapacitated or die |
| Succession planning | Who takes over the business and client relationships if the principal dies or becomes incapacitated |
| Client notification | Timely notification to clients of material disruptions |
Exam Tip: Gotchas
- The plan must cover communication with regulators, not just clients. "Alternate communications" includes backup methods for reaching regulators and employees too.
- Succession planning is specifically required. It is not an optional add-on; NASAA includes it as a mandatory BCP element.
Maintenance Requirements
- BCPs must be reviewed and updated at least annually
- Updates should reflect changes in the firm's business model, personnel, technology, or regulatory requirements
- The plan should be tested periodically to ensure it works
Succession Planning
Succession planning is a key component, especially for smaller advisory firms:
- Who takes over the advisory business if the principal dies or becomes incapacitated
- Client relationship continuity - how clients will be served during a transition
- Regulatory obligations - ensuring ongoing compliance during the transition period
Exam Tip: Gotchas
- BCPs must be in WRITING and reviewed at least ANNUALLY. The exam may present a scenario where an adviser has a verbal plan or hasn't updated it in several years; both are violations.