United States: SEC Issues Guidance On Fund Business Continuity Planning

On June 28, 2016, the SEC's Division of Investment Management issued a Guidance Update titled, Business Continuity Planning for Registered Investment Companies (the "Guidance," available here). The Guidance states that a fund complex should consider its compliance obligations under the federal securities laws when assessing its ability to continue operations during a business continuity event. The Guidance discusses various steps that the SEC staff believes a fund complex should consider to evaluate its business continuity plan ("BCP") and the BCPs of its critical service providers to lessen business continuity risks for funds and investors.

On the same date that the Guidance was published, the SEC published a release (available here) containing proposed Rule 206(4)-4 under the Advisers Act. If adopted, Rule 206(4)-4 would require every SEC-registered investment adviser to adopt and implement a written business continuity and transition plan reasonably designed to address operational risks related to a significant disruption in the adviser's business. The SEC Rule 206(4)-4 proposal is the subject of a separate Ropes & Gray Alert (available here).

Background. As the impetus for the Guidance, the staff cites the August 2015 business disruption caused by a systems malfunction at a third party upon which a major fund pricing agent relied. The business disruption lasted for several days and prevented the pricing agent from providing NAVs to hundreds of mutual funds, closed-end funds and ETFs. Following that event, the Guidance states, SEC staff members concluded that some funds could have been better prepared for one of their critical service providers experiencing an extended outage and, further, that the outage highlighted the need for fund complexes to have robust business continuity planning. The Guidance also states that staff reviews of business continuity practices in the wake of Hurricanes Katrina and Sandy underlie the publication of the Guidance.

Recommendations. The Guidance's recommendations fall into two categories, with the first category applying to the fund complex, generally, and the second category applying to "critical fund service providers." In the staff's view, critical fund service providers are likely to include each named service provider under Rule 38a-1 (i.e., each investment adviser, principal underwriter, administrator, and transfer agent), as well as each custodian and pricing agent.

Both categories of recommendations are summarized below.

Fund Complexes "Notable Practices." The Guidance expressly recognizes that fund complex business models vary significantly. Nevertheless, in recent discussions with fund complexes, the staff observed the following programs and preparations, which the Guidance calls "notable practices." From the context, notable practices appear to be "measures the staff believes funds should consider," which is the phrase used in the Guidance's introduction, but taking account of the fund complex's business model.

  1. BCPs that cover a fund complex's facilities, technology/systems, employees and activities conducted by the adviser and any affiliated entities, as well as covering dependencies on critical services provided by other third-party service providers.
  2. BCP programs that involve a broad cross-section of employees from key functional areas, including senior management.
  3. Oversight of third-party service providers is conducted by key personnel, including the fund's Chief Compliance Officer ("CCO") and/or the CCO of other entities in the fund complex. The service provider oversight programs typically include both initial and ongoing due-diligence processes, including review of applicable BCPs for critical service fund providers. In conducting oversight, the fund complex typically seeks multiple sources of information, including independent control reports and, where appropriate, testing.
  4. BCP presentations are provided to fund trustees/directors, with CCO participation, on an annual basis and are also provided by the adviser and/or other critical service providers.
  5. Some form of testing of the fund complex's BCP occurs at least annually, and the results of the complex's tests may be shared in updates to fund boards.
  6. Business continuity outages, including those experienced by the fund complex or a critical third-party service provider, are monitored by the CCO and relevant staff, as well as reported to the fund board, as warranted.

Recommendations Implicating Critical Fund Service Providers. The Guidance offers the following:

  1. A fund complex should consider examining its critical fund service providers' backup processes and redundancies, as well as the robustness of the providers' contingency plans (including reliance on other critical service providers).
  2. A fund complex should consider how it can effectively monitor whether a critical fund service provider has experienced a significant disruption and the potential impacts on fund operations and investors. In addition, a fund complex should consider related necessary communication protocols. The protocols could include:

    1. Procedures for internal communications within the fund complex, as well as with a fund's board.
    2. External communications plans for continuing discussions with the affected service provider, as well as other providers, as warranted, and with intermediaries, investors, regulators, and the press, as appropriate.
    3. Maintaining updated, accessible contact information for communications between and among various key actors.
    4. Providing communications that report progress and next steps, which may include website postings, to assure accessibility and broad dissemination of information.
  3. A fund complex should consider how the BCPs of a fund's critical service providers relate to each other as a means to ensure that funds can continue operations or promptly resume operations during a significant business disruption.
  4. A fund complex should consider planning to manage the response to potential disruptions under various scenarios, whether such disruptions occur internally or at a critical third-party service provider.

*    *    *

The Guidance offers a range of suggestions regarding business continuity planning. The Guidance's recommendations, of course, are not tailored to fit every complex. Nevertheless, when considered by a fund complex, the staff's recommendations may trigger ideas or lines of inquiry that the fund complex has yet to consider. This is consistent with the Guidance's statement that the "staff recognizes that it is not possible for a fund or fund complex to anticipate or prevent every business continuity event."

The Guidance states that a fund complex should consider its compliance obligations under the federal securities laws when assessing its ability to continue operations during a business continuity event. However, the Guidance does not mention any specific obligations under the federal securities laws, nor does it point to any enforcement initiatives regarding when a significant business disruption effectively suspends a fund's legal obligations. That said, the SEC's simultaneous proposal of Rule 206(4)-4 under the Advisers Act may portend that "inadequate" business continuity planning will be the subject of future enforcement proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions