RIA Compliance Blog
Earlier this year, the North American Securities Administrators Association (NASAA), through a working group within the Senior Issues/Diminished Capacity Committee, issued a report of findings and recommendations relating to issues of cognitive impairment or diminished capacity that may affect investment advisers and other financial professionals. The report summarized information received by the working group from registered investment advisers, broker-dealers, and compliance consultants in the industry. The findings focused on communication, education, and succession planning as key elements of an effective plan to address impairment issues.
Of course, an adviser suffering from diminished capacity could face serious difficulties relating to his or her work, including not being able to provide effective service to the client or to comply with responsibilities under the securities laws, including meeting the standards of conduct and maintaining adequate books and records. Those interviewed in connection with the study indicated that the industry welcomes continued regulatory engagement and continued input on this subject. Many of them also identified existing guidance from NASAA, the Securities Industry and Financial Markets Association, and the Financial Services Institute as being resources they currently consult when issues arise.
Among the key areas considered are how firms can recognize signs of diminished capacity and how they should consider dealing with issues that arise. The report encouraged firms to consider implementing an appropriate training program to enable staff to detect “red flags” of impairment by an adviser and a mechanism to communicate concerns freely within an organization. While dementia associated with aging is still the most common reason for impairment, other underlying causes include accidents and traumatic injury, side effects from medications, a non-dementia medical diagnosis, and drug or alcohol addiction. When a situation is detected, how a firm should confront the adviser is a key issue, and one that may be fraught with both practical and legal considerations. The report summarized a few instances where firms had successfully dealt with such issues and stressed that sensitivity and respect should be paramount in every such encounter.
The report also encourages all firms and individual advisers to develop a succession plan, regardless of age. The report did not examine the types of succession plans that should be considered, but NASAA has other resources on that subject, including its 2015 Model Rule.
However, just as the types of training and other policies should vary from firm to firm, based among other things on the size, structure and services provided by the individual firm, succession planning is a concept that will vary among firms based on many of the same factors. RIAs that purport to “own” their client relationships will undoubtedly consider methods by which another representative within the firm are groomed to inherit or take over the book of an adviser who encounters capacity issues. Many firms already encourage advisers to identify potential partners who might ultimately service those clients, through established succession programs. The more successful of such programs encourage introducing the succeeding broker to the clients early, to ease any fears that may occur from a sudden, unexpected transition. Of course, these programs also establish agreements designed to protect a representative’s client relationship from being “poached” prior to the succession being triggered, and providing a compensation plan to the impaired adviser, her guardian or other legal representative.
For many small RIAs, an important consideration is how to deal with firm ownership issues when an owner suffers from cognitive impairment. For instance, an owner’s share could be made available for purchase by other advisers within the firm, some of which may also be firm owners. In such a situation, valuation of the book is key, and a clearly defined mechanism for establishing the value that must be paid by any adviser wishing and qualified to purchase the affected owner’s interest must be included in any such plan. Smaller RIAs may also wish to consider establishing a plan whereby all firm clients are transferred to a different RIA altogether, with the goal of winding down and dissolving the RIA owned by the adviser suffering the impairment. In this situation, putting agreements and other mechanisms in place to accomplish the movement of advisers not suffering from impairment from one firm to the other should be a primary concern.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.