Before the Securities and Exchange Commission (SEC) released a proposed rule on transition plans for registered investment advisors (RIA’s), the most significant requirement for living wills was contained in Dodd-Frank and was aimed at the largest banks in the US. A fair amount had been written about what the banks have done, and the challenges they had.
Below are the major elements included in the big banks’ living will plans, which may assist advisors prepare for the SEC’s proposed rule.
Advisors should have sufficient capital to ensure they can continue to provide sufficient critical services as the firm is resolved.
Advisors should be able to reliably estimate and meet their liquidity needs prior to, and in resolution.
Advisors must have an adequate governance structures with identifiable thresholds for triggering the transition plan.
Advisors should have the ability to run their business while winding it down, including identifying all assets, collateral, have clear set of actions laid out, and ensure that any shared resources will continue.
Legal entity rationalization
The large banks all had relatively complex legal structures that made winding down their operations very difficult. While this element may not be relevant to advisors, the take-away here for advisors is to ensure that the legal structure is a component of creating their living will.
Derivatives and trading activities
Given the fluid nature of some securities trading, the large banks spent a considerable amount of time assessing how trading activities would be curtailed or shut down.
A very good document to read is entitled “Resolution Plan Assessment Framework and Firm Determinations” issued jointly by the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) on April 13, 2016.
For more information on regulatory compliance, or to learn how Baker Tilly's financial services specialists can help, contact our team.