FINRA Provides Guidance on Succession Planning

On November 1, 2022, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 22-23 (Notice) to highlight the benefits of registered representative (RR) succession planning for customers, member firms, and the representatives themselves.  

The Notice also emphasized the importance of succession planning given the impact of the COVID-19 pandemic and the industry’s demographic trend of an increasing number of representatives at or approaching traditional retirement age.

What is succession planning?

Succession planning is typically done to address instances where RRs leave the industry due to expected events such as retirement and unexpected events such as disability and death. The practice is also known by other names, e.g., retirement planning, legacy planning, transition planning, and sunset planning. 

Succession planning can comprise the following activities:

• Organizing RR teams to ensure uninterrupted support for customers 

• Selling an RR’s book of business to another firm or affiliated RR  

• Hiring or developing a junior representative to take over the RR’s book of business 

• Having RRs designate, in advance, who their successor will be 

• Creating and implementing contingency plans for succession when specific events such as an RR’s incapacity or death occur 

• Having a plan in place to reassign customer accounts when an RR leaves the firm  

• Ensuring that firm staff or other representatives maintain customer service while the firm seeks potential buyers for the RR’s book of business

Relevant FINRA rules and administrative processes

In the Notice, FINRA discussed the following regulatory considerations that firms and RRs may face when considering a succession plan:

• An event involving a key person could be an emergency or significant business disruption that triggers the firm’s business continuity plan under FINRA Rule 4370. 
• A change in ownership could trigger an obligation to file a continuing membership application under FINRA Rule 1017.
• Succession planning may incorporate the continued payment of commissions to retiring representatives, which must be consistent with FINRA Rule 2040(b) and the SEC Staff Retired Representatives Guidance. 
  • FINRA has brought disciplinary actions against representatives for altering or falsifying joint representative codes under FINRA Rule 2010 and FINRA Rule 4511.
• Representatives who wish to leave open the possibility of returning to the industry may participate in FINRA’s Maintaining Qualification Program, allowing them to retain their qualifications by completing Continuing Educations, as required by FINRA Rule 1240.  The RR would be able to reactivate his/her license for up to five years.
• The anticipated sale of a book of business may present a conflict of interest subject to disclosure under the SEC’s Regulation Best Interest. 
• Member firms should consider Regulation S-P’s limits on disclosure of nonpublic information about customers.
• Customers are not bound by member firms’ or RRs’ decisions and succession plans should be communicated to customers under Regulatory Notice 19-10.
• Member firms must have at least two registered principals and one financial and operations principal under FINRA Rule 1210 or seek an exemption under FINRA Rule 9610.
• Firms should research the professional background of member firms and registered representatives to understand potential issues and risks:
  • Disciplined persons may seek to sell or transfer their book of business to another representative who will improperly act as a proxy for and share commissions with the former representative.
  • Bad actors may seek to purchase a book of business to obtain access to customers’ accounts and information for fraudulent schemes.

How we help

ACA helps broker-dealers understand the succession planning compliance and operational issues relevant to their businesses. Among other support, our consultants help firms design customized procedures to address their specific succession planning needs and requirements.

For more information, please reach out to your ACA consultant or contact us.

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