7/15/16 - SEC Proposal Would Require Investment Advisers to Plan for Business Continuity amid Major Disruptions
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7/15/16 - SEC Proposal Would Require Investment Advisers to Plan for Business Continuity amid Major Disruptions

The Securities and Exchange Commission in June proposed a rule that would require SEC-registered investment advisers to formally plan for the continuity and transition of their business in the event of a major disruption in operations. The proposed rule, issued under the Investment Advisers Act of 1940, would require all advisers to adopt and regularly review business-continuity and transition plans. It would also amend an existing rule under the Investment Advisers Act, by requiring advisers to keep copies of all continuity plans that are or were in effect during the previous five years and to maintain written documentation of annual reviews of their plans.

The proposal reflects a continued focus by the SEC and other regulators on mitigating the risks disruptive events pose to the U.S. financial system. As part of their fiduciary responsibility, advisers are already expected to assess these risks and implement policies and procedures to address them. But while many advisers have plans in place, the SEC noted that these plans “may not be sufficiently robust to mitigate the potential adverse effects of a significant business disruption on clients.” For that reason, the proposal seeks to address widespread weaknesses in current plans by outlining specific requirements. The new rule would allow for some flexibility and tailoring of plans to fit the particular operational and other risks an adviser faces.

Business Continuity

Under the proposed rule, a plan must address internal and external events that could significantly disrupt operations, such as the departure of key personnel, loss of service from a third-party provider, natural disasters, and cyberattacks. To minimize material service disruptions and potential client harm in the case of such an event, the plan must include written policies and procedures to:

  • Maintain systems and protect, back up, and recover data
  • Prearrange alternate physical locations for the adviser’s offices and/or employees
  • Communicate with clients, employees, third-party service providers, and regulators
  • Identify and assess third-party services critical to the operation of the adviser

In developing their plans, advisers would need to consider the risks and challenges posed by their operations, size, and complexity. Plans would likely vary from adviser to adviser, depending on the likely impact of certain events on their businesses.

Transition Planning

The rule would also require advisers to create a plan for operational transitions in both stressed and normal mar-ket conditions. These transition plans would need to include policies and procedures for safeguarding, transfer-ring, and/or distributing client accounts and promptly generating client information necessary for transferring ac-counts in the event that an adviser must cease or wind down operations. Additionally, plans would need to outline the corporate governance structure for the transition process and assess the laws and contractual obligations applicable to the adviser. Like business-continuity plans, transition plans would be highly adaptable and should consider the best interests of the advisers’ clientele.

Contact Promontory

Promontory helps regulated entities, including investment advisers, understand and meet their compliance obligations. Please call us to discuss the SEC’s proposal and how advisers should prepare for potential regulatory changes. For more information, please contact:

Conway Dodge
Managing Director
+1 202 370 0461

Michael Sullivan
Managing Director
+1 202 370 0507

Jacob Lesser
+1 202 370 0397