On June 28, 2016, the Securities and Exchange Commission (SEC) proposed a rule that would require all SEC-registered investment advisers to adopt and implement written business continuity and transition plans to address operational risks related to significant disruptions.
The proposal seeks to address an investment adviser’s fundamental operational risks that are caused by internal and external business continuity events. Such risks could impact the ability of an adviser to continue operations, provide services to his or her clients, and potentially transition the management of accounts to another advisor. It is the SEC’s view that “as part of their fiduciary duty, advisers are obligated to take steps to protect client interests from being placed at risk as a result of the adviser’s inability to provide advisory services.” While many advisers have already taken steps to address and mitigate the risks of business disruptions, the SEC seeks to enhance this process with this proposal.
Under the proposed rule, the written business continuity and transition plans would, at a minimum, include policies and procedures concerning the following:
- Maintenance of critical operations and systems, and the protection, backup, and recovery of data;
- Pre-arranged alternate physical location(s) of the adviser’s office(s) and/or employees;
- Communications with clients, employees, service providers, and regulators;
- Identification and assessment of third-party services critical to the operation of the adviser; and
- Plan of transition that accounts for the possible winding down of the adviser’s business, or the transition of the adviser’s business to others in the event the adviser is unable to continue providing advisory service.
While the plans should meet this established criteria, advisers would be permitted to tailor the details of their plans based on the risks associated with their particular business model, including size, technological infrastructure, nature, and complexity of operations.
SEC-registered investment advisers would also be required to retain copies of plans that are in effect or were in effect for the past five years while also implementing an annual review on the adequacy and effectiveness of their plans. During this time, they would be expected to consider any changes to the adviser’s strategic, operational, and regulatory environment that might suggest a need to revise the plan. A formal record documenting this review would also need to be maintained.
The proposed rule is still in the review period and is open for public comment. Overall, the SEC is seeking input on various aspects of the proposal, such as scope, clarification, cost, and benefit of implementation.
Some specific topics that the SEC is looking for feedback on are as follows:
- Instead of all SEC-registered advisers, should the SEC identify only a subset of SEC-registered advisers that must implement such plans? If so, which advisers should be in such a subset and why?
- Should all applicable advisers be required to include each of the proposed components in a business continuity and transition plan, or should certain advisers be exempt from including certain components? If so, why?
- Will the proposed rule have any other implications for investment advisers that are also subject to other regulatory requirements regarding business continuity and/or transition planning (e.g., FINRA or CFTC rules)?
Comments are due by September 6, 2016.
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