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Encore | Preparing for the Unexpected: The Ins and Outs and the Value of Succession Planning

November 28, 2023

Succession planning, catastrophe planning, contingency planning--whatever you want to call it, these plans are important not just for customers and registered representatives but can even be a matter of life or death when it comes to the continued existence of a firm. 

On this episode, we talk to Jeanette Wingler, FINRA’s Special Assistant to the CEO, and Elena Schlickenmaier, a Senior Principal Analyst in Member Supervision, to dig into Regulatory Notice 22-23 on succession planning to hear how and why firms should plan for the expected and unexpected in life.


Resources mentioned in this episode:

Regulatory Notice 22-23

Rule 4370: Business Continuity Planning

Rule 2040: Payments to Unregistered Persons

Continuing Membership Application Resources

FINRA Examination and Risk Monitoring Programs

Listen and subscribe to our podcast on Apple PodcastsGoogle PodcastsSpotify or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 



00:01 - 00:40

Intro: We are dipping into the archives for a look back at an episode that originally aired in January 2023. We will be back with new episodes in two weeks. Succession planning, catastrophe planning, contingency planning—whatever you want to call it, these plans are important not just for customers and registered representatives but can even be a matter of life or death when it comes to the continued existence of a firm. On this episode, we dig into FINRA's Regulatory Notice on succession planning to hear how and why firms should plan for the expected and unexpected in life.   


00:40 – 00:49

Intro Music


00:50 - 01:15

Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm pleased to welcome to the show two guests today to discuss all things succession planning. Joining us once again is Jeanette Wingler, Special Assistant to the CEO. And joining us for the first time is Elena Schlickenmaier, a Senior Principal Analyst in Member Supervision. Jeanette and Elena, welcome to the show. To begin, can you both introduce yourselves and tell us what you do at FINRA? Jeanette, maybe we can start with you since your role has changed since you last joined us on the podcast in May.


01:21 - 01:35

Jeanette Wingler: Sure. I'm Jeanette Wingler. I'm currently a Special Assistant to FINRA CEO Robert Cook, but until recently I was an Associate General Counsel in FINRA's Office of the General Counsel, where I focused on several subject areas, including representative recruitment and succession planning. 


01:39 - 01:48

Kaitlyn Kiernan: And if you listened to our Senior Investor Protection podcast last May, you will recognize Jeannette's voice from that episode. Now, Elena, how about you? Can you introduce yourself? 


01:50 - 02:31

Elena Schlickenmaier: Absolutely. I work in the Strategic Research and Analysis Group in Member Supervision, and we work on a number of special projects and publications such as the well-known Exam and Risk Monitoring Report, as well as a number of other initiatives for FINRA senior leadership and Member Supervision senior leadership. In terms of a little bit of background about me as a new guest to the podcast, I'm an attorney and spent some time at a large law firm working on broker-dealer, regulatory and compliance issues, and also some time in the industry where I actually observed a number of formal and informal succession plans. So, there's a little bit of a personal story to the way that I came to this topic. 


02:31 - 02:43

Kaitlyn Kiernan: That's good to know. Thank you, Elena. So, in November, FINRA published Regulatory Notice 22-23, which provides guidance on succession planning. What was the inspiration for this Reg Notice? 


02:45 - 03:14

Jeanette Wingler: So, the Reg Notice came out of a series of conversations that we were having. At the beginning, it was that the COVID pandemic and recent industry demographic trends that have spurred greater focus on an adoption of succession plans in recent years. We also learned that many firms have developed and implemented succession planning programs at different forms based on their business model size and other considerations. We've also seen succession planning come up in our regulatory programs, such as Questions to the FINRA Securities Helpline for Seniors. 


03:20 - 03:54

Elena Schlickenmaier: One great example of that would be a recent interaction with the helpline where a firm's Chief Compliance Officer and their FinOp unexpectedly died during a weekend, and they had engaged with FINRA and the senior helpline to share what had been happening. But this is actually a huge success story because as a result of that robust and thoughtful succession plan that they had put in place, they were able to almost immediately over the course of that weekend and the coming days, hire a new CCO and a new FinOP and really make sure that their firm was operating and continuing to support customers without missing a beat. 


04:01 - 04:36

Jeanette Wingler: These conversations and the stories like Elena just told led us publishing guidance in Regulatory Notice 22-23, and this Notice is part of our ongoing commitment to provide transparency to firms about FINRA's regulatory programs, as well as guidance about emerging trends and practices we see at firms. So, just a note on the demographic trends that we mentioned in the Notice, including the increasing number of representatives who are at or approaching the traditional retirement age of 65. It's important to remember that the benefits of proactive succession planning are not limited to any particular age group. And succession planning is not just for retirement. Succession planning can come into play for expected and unexpected events like death and disability. And as we lay out in the Notice, a number of firms offer catastrophe or contingency plans to cover a wide range of events. 


04:58 - 05:13

Kaitlyn Kiernan: Great. Thank you. So, it sounds like there's a number of factors that led to this being published now, but it is a great thing to consider at all points in a firm's lifecycle and an employee's lifecycle. So, that's great to know. And what types of plans and resources have we seen? 


05:17 - 05:18

Elena Schlickenmaier: One of the most interesting things about this topic, Kaitlyn, is just the breadth and the variety of succession plans that we were able to learn about through our engagement with the industry. There's a lot of compliance areas where what you see is relatively consistent across firm grouping or firm business model or even firm size. But here there are as many flavors as there are firms. So, we've seen retirement plans, legacy plans, transition plans, accession plans, lots of different names used, lots of different models that have been created, many of which have formal elements and informal elements. Some are purely internal. Some have an external component where there's support or infrastructure to facilitate a sale of a rep's practice to another firm or another rep. And in particular, of course, this is a topic that is of great interest to small firms and sole proprietorships. Where not having a succession plan may mean that the firm stops operation or requires the sale of that firm. 


06:21 - 06:29

Kaitlyn Kiernan: FINRA rules don't directly require succession planning, I believe. So, I was just wondering in that case why we are providing guidance on this topic. 


06:31 - 08:53

Jeanette Wingler: You're correct. Our rules don't require that firms or representatives adopt formal succession plans, but succession planning can intersect with several legal and regulatory areas. So, we published the Notice to aid firms and representatives in developing and implementing the plans. And the Notice provides an overview of related FINRA rules and administrative processes. But I want to underscore that the Notice is a resource and doesn't create new legal or regulatory requirements or new interpretations of existing requirements. So, I want to highlight a few areas, but I suggest reading the Notice for more detail. First, while FINRA rules do not require that firms or representatives adopt separate succession plans, member firms are required to adopt business continuity plans, and that's our Rule 4370. 


So, depending on their role and responsibilities at a firm, an event involving a key person such as a representative's incapacity or death could be an emergency or a significant business disruption that triggers the firm's BCP. So, this is more likely to occur if the firm is a sole proprietorship or has a small number of registered persons. Another important area is our Membership Application Program. A member firm's succession plan may involve the MAP rules and there could be a requirement to file a Continuing Membership Application or engage in a materiality consultation. 


So, for example, a change in ownership could trigger an obligation for a firm to file a CMA with FINRA. This is why we really encourage firms to have open dialogues with their FINRA risk monitoring analysts about their succession plans. Another important area that we highlight in the Notice is that firms' internal succession planning programs may incorporate agreements to pay continuing commissions to retiring representatives, and that these plans need to be consistent with the federal securities laws and FINRA rules. In particular, FINRA Rule 2040. And there's a series of prior No Action Letters from the SEC that address how member firms can pay transaction-based compensation via continuing commissions to retiring representatives after they cease to be associated with the firms. 


08:53 - 09:04

Kaitlyn Kiernan: Thanks, Jeanette. And that seems to be a good overview of why this is so important for firms and maybe individual reps as well. But what about when it comes to the impact on customers? 


09:04 - 09:33

Jeanette Wingler: So, in thinking about succession planning, it's important to remember that customers are not bound by the firm or their representative's succession planning decisions. And a customer is free to choose to transfer some or all of their assets to another representative or firms. So, it's really important that firms think about how they're going to communicate succession plans to their customers, and particularly how they're going to communicate with customers about the reassignments of their accounts. So, member firms should communicate clearly when customers ask questions about the departing representatives. And we expect that customers should not experience an interruption in service due to a representative's departure. 


09:45 - 09:59

Kaitlyn Kiernan: And it seems like having a smooth succession plan might increase your chances of keeping customers if they felt like the whole process kept them in mind and kept them informed along the way. So, Elena, what are some of the benefits of having a proactive plan for firms and representatives? 


10:03 - 11:33

Elena Schlickenmaier: For firms, a proactive plan plays a big role in helping them minimize operational and other risks to their business. And of course, it helps them make sure that they have the appropriate staff and the appropriate operational infrastructure to respond to regulatory inquiries, including, of course, FINRA Exams and FINRA investigations, but also engagements with other regulators. However, it is probably most important in a lot of ways for representatives and impacts them much more directly. It helps them plan for very significant life events such as retirement, death, disability, illness, cognitive decline, and of course everything I just mentioned includes both planned and unplanned events. Representatives can also benefit greatly from receiving compensation for their books of business, either as part of a formal internal plan or in terms of selling their book of business to another representative or another firm. And perhaps most importantly, and this is something that certainly resonated very deeply with many of the firms and many of the representatives that we spoke with, it helps retiring representatives with managing the long-standing and close relationships that they have with their customers and handing those customers over to another representative that they feel will continue the level of support and provide that same level of care that they have been giving to their customers during their professional career. 


11:34 - 11:43

Kaitlyn Kiernan: That broker-customer relationship can grow quite close after years of working together. Jeanette, are there any other benefits to the customer relationship you'd want to highlight? 


11:45 - 12:14

Jeanette Wingler: So, the communications around succession planning with customers is really important because those communications play a critical role in helping the customer understand how and by whom their account will be serviced. And those communications help the customer make an informed choice about working with the new firm or representative, or instead transferring the account to another firm or representative. So, succession planning can also help representatives that are servicing new accounts by helping provide background information about the customers that the new representative will be servicing. 


12:20 - 12:31

Kaitlyn Kiernan: So, as part of the conversations with firms in developing this Notice, did you come across any firms that were really prioritizing succession planning? And if so, were there any effective practices you can share from those firms? 


12:34 - 13:02

Elena Schlickenmaier: Across all of the conversations that we had, we found that almost all firms were either thinking about or proactively succession planning for their representatives. So, the degree of interest and engagement in this was actually really surprising and very encouraging for us. In particular, there were one or two firms that really stood out in terms of the level of commitment that they showed to this topic and the degree of understanding that they had of its significance, both for their representatives and for their business and for their compliance program. 


These firms explicitly made succession planning a business and compliance goal for the firm and for their representatives. They created centralized support functions to help representatives implement succession plans and provide related implementation support. They required or recommended all representatives adopt short-term disaster or contingency plans. They ran relatively comprehensive educational campaigns all across their offices and all across their representatives, including virtual meetings, in-person meetings, compliance notices and articles, discussions at their firm, day or conference. We could go on and on, but the highlight of all of that communication was really the success stories of actual representatives who implemented succession plans, telling others about what worked well and what didn't, and how they really benefit, and what the goals and the impact of that work was. Last but not least, they provided practical support. So, workshops, playbooks, hiring consultants, all kinds of other tools that help representatives that would like to pursue a succession plan be able to successfully implement it for them and for their own customers. 


14:23 - 14:39

Kaitlyn Kiernan: Thanks, Elena. Now, a sensitive situation might be where a firm staff member suspects diminished capacity in one of their representatives or senior compliance staff. Jeanette, do you have any effective practices FINRA gathered during this process from firms dealing with that challenge? 


14:42 - 15:13

Jeanette Wingler: We do address suspected diminished capacity in the Regulatory Notice, and concerns around diminished capacity really underscore the value of proactive succession planning. So, what we learn is that some firms have implemented a comprehensive approach to address suspected diminished capacity in representatives, and a few examples of the practices from those firms are implementing training for all firm staff, formalizing an escalation process to raise concerns relating to cognitive issues by staff and other representatives, establishing a diminished capacity committee to collectively evaluate these issues and deciding on next steps and supporting representatives with implementing a new working arrangement or developing a succession plan. 


15:32 - 15:50

Kaitlyn Kiernan: Now, let's transition to some of the more practical suggestions included in the Reg Notice. At thirty-one pages, this is one of FINRA's lengthier Notices. So, I definitely encourage people to check out the full Notice via the link in the show notes. But just to start, Elena, what are some of the varieties of succession plans out there? 


15:54 - 16:33

Elena Schlickenmaier: So certainly I mentioned any external succession plan programs a little bit earlier in our conversation, so that would be a more traditional sale of a practice from one representative to another, one representative to another firm. Also, a merger or an acquisition would be a type of external succession planning program because that allows a firm to merge into or to be acquired or to acquire another firm. But the greatest variety and the greatest complexity for more conversations and from the guidance that we put out are really the internal succession planning programs where the goal is for a representative to transition his or her customers to another representative. A lot of what we saw included an emphasis on teams, so that would be creating a small or sometimes large organization of representative teams with one or several representative lead and several supporting representatives who would then be taking over that practice once the more senior representatives retire or depart the firm. We saw in some cases firms allowing representatives to have the autonomy to reassign customers from one representative to another. And then some of what surprised us most, but also encouraged us most, is the broad levels of support that we saw even in firms that were not intentionally creating a more formal program in terms of providing types of informal support and tools to representatives. 


17:29 - 17:40

Kaitlyn Kiernan: So, with so much diversity in terms of how firms and representatives are approaching this topic, do you have a sense of whether in the industry people are more approaching this in an informal manner, like you mentioned, or with a more formal program? 


17:44 - 18:12

Elena Schlickenmaier:  I'd say there's definitely a mix and certainly depends on the business model and the size of the firm. Some of the informal programs that we've seen include a lot of education to representatives about the need for succession plans, the availability of firm programs such as raising succession planning during firm branch inspections from conferences and webinars, coaching programs and events attended by representatives, spouses, their heirs. And some firms also maintain dedicated internal websites with education and other resources for representatives. We've also seen internal programs that include a tool or a service to match representatives who may be interested in succession planning that includes information or data from representatives about their experience, customer accounts, investment approach. Some firms even use their diversity, equity, inclusion, or DEI initiatives, to facilitate interactions and relationships between representatives who are interested in succession planning. 


And of course, and especially since the pandemic, our ability to engage virtually and to communicate with customers has enabled a number of firms to really focus on matching representatives who live in different geographic areas, which may have not been available in the past. Last, but certainly not least, some firms have provided bridge financing or other financial support to facilitate purchases, including in-house services or technical tools to help representatives determine a business's market value. In some cases, firms have engaged consultants or third-party vendors to help representatives work through this process, determine the value of their practice, and connect with potential buyers. 


19:23 - 19:28

Kaitlyn Kiernan: And how can firms think about incorporating succession plans into the compliance process? 


19:30 - 19:59

Elena Schlickenmaier: The way we were envisioning member firms engaging with this Notice is to use both the guidance that is provided and the questions of consideration that are included in the publication to consider the ways in which their programs are structured to make sure that they are in compliance with all of the relevant requirements. In addition to the material that we provided in the Notice, we're also continuing to provide firms with more practical tools and questions that helps them evaluate their programs and consider ways to enhance them. 


20:06 - 20:13

Kaitlyn Kiernan: And if firms wanted some ideas on how to conduct this kind of review, have we shared anything in the past that might be helpful as a starting point? 


20:16 - 21:10

Elena Schlickenmaier: Absolutely. So, in prior reports on FINRA's Exam and Risk Monitoring Program, in particular the 2022 and the 2021, we've included an appendix that shares some objective practices. We've seen member firms get the most value out of the material that provide both in the report on our Exam and Risk Monitoring Program and of course, on any other material that we share, including this Notice. Some of the firms that have done the best job and have really gotten the most out of our publications have done a comprehensive review of the material that we've provided, identified those areas that are relevant to their business, to their compliance program, then performed a risk assessment to determine whether there are any topics that are particular concerns for their firm, then done a gap analysis to think about any areas that are not currently covered or that are inadequately covered in their WSPs or their compliance programs and then developed project teams and work streams. And again, this can be more formal at a larger firm or more informal at smaller firms and could really be one or two people at a smaller firm. 


Some of the most successful firms in this area have used interdisciplinary project teams, so that would be including operations, compliance, supervision, risk, business and legal, which is really necessary for a topic like succession planning because it touches so many areas of a firm's operation. Last but not least, they shared about a lot of what they've done sharing the successes, sharing the changes, sharing the accomplishments with their business leaders, with their compliance leaders, and shared both the requirements and the guidance and the effective practices and any relevant questions from the material with their staff and their representatives and where appropriate, conducted training to make sure that everybody on the firm is on the same page about what the next steps are and what is required from them on a day to day basis. 


22:21 - 22:37

Kaitlyn Kiernan: So, Elena, you mentioned that most of the firms we talk to are already very much considering succession planning, which is great. But for firms that are just starting to consider developing a succession plan or maybe are just starting to think about it more seriously, what are some questions they should consider as they get going in this process?


22:41 - 23:16

Elena Schlickenmaier: As you mentioned, this is certainly one of our lengthier Notices and that was very much intentional. First, we wanted to really drive home the scope and complexity of succession plans as well as the breadth of the relevant regulatory requirements. And of course, we won't be able to cover all of the questions here, but we wanted to highlight a few categories of questions. Hopefully it will prompt firms to think about succession planning and dig deeper into the Notice and start engaging their compliance teams. 


First, has your firm thought about succession planning? If not, why not? We found that a lot of firms had thought about succession planning but just didn't know what to do next. And this Notice really helps address that issue. If your firm has a succession plan, what are the elements of your firm's plan? And does it truly cover all aspects of your firm's business model? Your reps needs? Your customers' expectations? How often do you review it? Have you recently reviewed it? Does your firm consider any additional steps that may be necessary for succession planning for key staff such as your firm's CEO, CFO and staff requiring certain registrations such as the FinOp? 


How have your firm's business or your reps and customers' needs change recently? How is your firm addressing risks relating to all of the technological changes that are usually required to support succession planning, including addressing obligations related to safeguarding non-public customer information for your firm and representatives? Does your firm address the risks of diminished capacity or health conditions that may unfortunately impact representatives' ability to meet their obligations to customers, comply with legal requirements and follow firm procedures? Has your firm helped train representatives on spotting red flags of diminished capacity or provided any support or guidance about how to communicate about these issues? Does it have a process for staff to internally escalate these concerns? 


And last but not least, how does your firm supervise and surveil reps in the succession planning program, including monitoring for red flags of financial activities that may indicate unauthorized activities or misconduct? Does your firm address risks for representatives with a disciplinary history? What are your firm's program requirements and how does your firm address when representatives in the succession planning program violate those terms and conditions? Violate their agreements with another representative? Violate federal securities laws? Violate FINRA rules? We don't mean to end on a negative note, but we certainly hope that this Notice is a great starting point for future conversation amongst firms, amongst representatives, and, of course, with FINRA. 


25:23 - 25:33

Kaitlyn Kiernan: Thanks, Elena. Those are a lot of really great questions to consider. As we wrap up, who can firms go to if they have additional questions as they work to develop our implement succession plans? 


25:37 - 25:48

Jeanette Wingler: Contact information for Elena and myself is listed in the Regulatory Notice. But your Risk Monitoring Analyst is a valuable resource for succession planning related questions, and we encourage you to speak to your RMA. 


25:51 - 26:12

Elena Schlickenmaier: We really welcome feedback on how firms are using the Notice. Any conversations that are prompted by the questions or considerations. Any practices or changes that firms are considering implementing and in particular, any tools or resources that firms feel would be helpful for FINRA to provide to help them as they evaluate and enhance their succession planning programs. 


26:16 - 26:41

Kaitlyn Kiernan: Thank you, Jeanette and Elena for joining me today to talk about all things succession planning and this Reg Notice. That's it for today's episode. But for our listeners, if you don't already, you can subscribe to FINRA Unscripted, wherever you listen to podcasts. And if you have any feedback on today's episode or ideas for future episodes, you can email us at [email protected]. Today's episode was produced by me, Kaitlyn Kiernan, engineered by John Williams and coordinated by Hannah Krobock. Until next time. 


26:41 – 26:50

Outro Music


26:50 - 27:13

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