While there are many risks to starting a business, one of the greatest is the potential for a low-probability but high-impact “business disruption”, from the unexpected death of a key employee, to a cyber-attack or a natural disaster like a hurricane.
Arguably, having a plan to contend with such business disruptions is simply good business, but the SEC has noted that, in the aftermath of events like Hurricanes Katrina and Sandy, not all RIA firms appear to be sufficiently prepared to contend with a significant business disruption.
Accordingly, the SEC has proposed a new Rule 206(4)-4, which would make it unlawful to provide advisory services to clients unless the RIA has a business continuity and transition plan (that is reviewed at least annually). In fact, the SEC has stated that it views having a business continuity plan as essential for an advisor to fulfill their fiduciary duty; or viewed another way, the firm that isn’t prepared for a business disruption isn’t prepared to fulfill its fiduciary duty to clients.
While still only a proposed rule at this point, the SEC’s effort to require a business continuity plan comes on the heels of a similar Model Rule put forth by NASAA last year for state-registered investment advisers, and seems likely to pass in some form.
For many SEC-registered RIAs, the new rule will simply be a ‘healthy’ nudge to enact continuity plans that should be a matter of good business anyway. Though in some cases, the greatest challenge will not be figuring out business continuity in the event of a disaster, but a transition plan in the event that the advisory firm owner unexpectedly dies – a requirement that necessitates either the orderly wind-down of the business, or establishing a buy/sell agreement now to ensure that another firm can step in to act if necessary. Could such a requirement finally spur interest from more advisory firm sellers in what up until now has been a marketplace dominated by buyers?