Alert November 15, 2022

FINRA Urges Firms to Focus on Succession Planning

FINRA recently published Regulatory Notice 22-23, providing guidance regarding firm and representative succession planning, including relevant FINRA rules and administrative processes and questions firms can consider when developing and implementing their succession plans.  FINRA’s focus on succession planning has been driven by industry demographic trends, which indicate that nearly 30% of registered representatives are approaching retirement age, and the impact of the COVID-19 pandemic. 

FINRA and the SEC have also seen illegal activity involving succession issues, especially around the transfer of customer accounts, including the falsification and alteration of joint representative codes by representatives who have entered into written agreements with retired representatives, and unauthorized retention of customer nonpublic personal information by a registered representative after resignation.

It would come as no surprise to see succession planning included as an area of exam coverage in 2023, but succession planning has important benefits for firms, representatives, and customers that go beyond exam readiness. FINRA offers short case studies of firms that had, and some that did not have, good succession plans. In one case, a small firm’s CCO and FinOp died unexpectedly one weekend. Because the firm had a succession plan in place, the firm promptly notified FINRA and engaged a recruiting firm to hire a new CCO and FinOp, ensuring that it was able to continue operations. In another case, a co-owner of a firm without a succession plan called FINRA to discuss concerns about the other co-owner, who was exhibiting signs of diminished capacity. The owner making the call was unsure how to address this with the co-owner, transition ownership of the business, or discuss the matter with customers. FINRA assisted the firm in addressing the issues. 

Notice 22-23 offers an encyclopedic survey of issues touching on succession, including business continuity, situations that may require making a continuing membership application (CMA) or obtaining a materiality consultation (MatCon), and payment of continuing commissions to retiring representatives.  

Steps to Take Now and Later

Firms and their principals should begin (or revisit) the process of developing their succession plans. The Notice included questions firms can ask themselves classified under these eight categories: (1) plan development; (2) program elements; (3) financial professionals; (4) compensation; (5) customer communications; (6) business continuity planning; (7) Membership Application Program; and (8) customer nonpublic information. 

Firms can take various steps now to mitigate the risk of succession challenges later.  FINRA encourages proactive engagement with representatives regarding performance and alternate work arrangements. Firms should also be mindful of their legal and regulatory obligations, including limitations associated with the disclosure and use of customer nonpublic information under Reg. S-P and other obligations and communications to customers.

Compensation and other economic issues deserve attention but, ultimately, as firms and their representatives develop and implement their succession plans, consideration will need to be given to the key issue on FINRA’s radar—customer protection.