United States: SEC Proposes New Requirement For Business Continuity Plans For Investment Advisers

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 a business continuity and transition plan ("BCP").1 The BCP would need to be reasonably designed to address operational and others risks related to possible significant disruptions in the adviser's business. According to the Proposing Release, without an adequately robust plan, the SEC believes it would be "fraudulent and deceptive" for an adviser to provide advisory services.

The SEC has previously noted that business continuity plans should be addressed in an adviser's compliance policies and procedures in accordance with rule 206(4)-7.2 In the Proposing Release, the SEC recognized that most investment advisers already have a BCP, but pointed to observed weaknesses and inconsistencies in those plans identified through the examination process.

Proposed rule 206(4)-4 identifies the explicit requirements for what makes a BCP "reasonably designed to address operational and other risks." The SEC acknowledges in the Proposing Release that businesses will vary and the approach to business continuity will depend on the specific attributes of each business, but nonetheless requires certain elements.

BCP Elements

The proposed rule would require SEC-registered advisers to adopt and implement written BCPs that include policies and procedures addressing (i) business continuity after a significant business disruption, and (ii) business transition if the adviser is unable to continue providing advisory services to clients. The Proposing Release includes various situations to consider in designing the BCP, such as natural disasters, acts of terrorism, cyber-attacks, equipment or system failures, or loss of a service provider, facilities, or key personnel. Transitions should address when an adviser exits the business, merges, or sells its business. The BCP should serve to minimize disruptions during any of the designated events.

The content of a BCP would be based upon the risks associated with a particular adviser's operations, and would be required to include several key elements, summarized below.

a) Policies and Procedures on the Maintenance of Critical Operations and Systems and the Protection, Backup, and Recovery of Data

An adviser's BCP would be required to include policies and procedures that address the maintenance of critical operations and systems, and the protection, backup, and recovery of data, including client records. The BCP should identify and prioritize the functions, operations, and systems critical to the adviser's business, and should consider, and possibly provide, alternatives and redundancies to promote continual operation despite a business disruption.

The Proposing Release identifies as critical operations and systems those that are used to (1) process portfolio securities transactions for clients, (2) value and maintain client accounts, (3) provide access to client accounts, and (4) deliver funds and securities. The Proposing Release also focuses heavily on the need to identify and evaluate the role of third-party service providers in performing critical functions, and emphasizes the need for advisers to evaluate the business continuity controls in place at such firms. Finally, the BCP should identify the key personnel that are integral to the business or any of the critical operations and systems.

The Proposing Release notes that the data backup and recovery component of a BCP should include an inventory of key documents, identifying the location and description of each item. These documents should include the management structure, risk management processes, and regulatory reporting requirements in the event of a business disruption.

The SEC also briefly addressed cybersecurity. As cybersecurity has been a hot topic, advisers are again reminded to have processes in place to respond to a cyber-attack.

Generally, the proposed rule addresses the what that needs to be addressed, but not how each factor must be addressed, giving advisers a fair amount of latitude to design BCPs tailored to their business.

b) Pre-Arranged Alternate Physical Location(s)

A BCP would have to include a pre-arranged alternate physical location for the adviser's office and employees. An adviser could consider remote access sufficient, but that is subject to the applicable technology, systems, and resources necessary for the business to continue securely.

c) Communications with Clients, Employees, Service Providers, and Regulators

The SEC noted that communication is critical to an adviser's operations. Thus, a BCP would also need to cover how employees are informed of an event, how employees should communicate during an event, and contingencies for who will take on certain responsibilities in the absence of key personnel.

The Proposing Release explains that advisers also should consider how and when to inform clients of a disruption and its impact, and advisers would need to ensure proper access to client records and contact information during a disruption to facilitate communication.

Also, consistent with the SEC's focus on third-party service providers and the risks associated with disruptions to their business, the BCP would have to cover communications with and notifications to service providers in the event of a disruption, either at the adviser internally or at the service provider.

Lastly, the BCP would have to include provisions to accommodate contact with regulators as appropriate.

d) Identification and Assessment of Third-Party Services Critical to the Operation

For each service provider, the BCP would have to identify services provided that are critical to the adviser's operations, including providers providing portfolio management, custody, trade execution, pricing, recordkeeping, and financial and regulatory reporting.

The BCP would need to take into account the relationship with each service provider and identify ways to mitigate risks associated with disruption at the provider, including possibly creating redundancies in the necessary services. The Proposing Release identifies the pricing issues encountered this past year as a recent example. The SEC notes that advisers may need to review materials such as a summary of a service provider's BCP, due diligence questionnaire, independent report, or other certification of operational resiliency, to properly tailor the adviser's BCP to the risks posed by each service provider.

e) Transition Plan

Finally, the BCP would need to include provisions addressing a possible winding down of the adviser's business or the transition of the business to others, including ways to mitigate risks in both normal and stressed conditions.

The proposed rule would require the transition plan's policies and procedures to:

  • safeguard, transfer, and/or distribute client assets during transition;
  • facilitate the prompt production of client information to transition each account;
  • cover the corporate governance structure;
  • identify any material financial resources available to the adviser; and
  • asses applicable legal and contractual obligations implicated by the transition.

Annual Review

If adopted, an adviser would be required to review the BCP and the effectiveness of its implementation at least annually. The review should consider any changes to the adviser's business and whether changes are necessary for continued adequacy and effectiveness.

Recordkeeping

In addition to proposed rule 206(4)-4, the Proposing Release also proposes amendments to the recordkeeping rule to require that the BCP be kept in accordance with an adviser's existing recordkeeping requirements. The annual review would also need to be documented and recorded.

Investment Company Guidance

The Division also issued guidance regarding funds' obligations under Investment Company Act rule 38a-1 for addressing business continuity. The guidance highlights several notable practices from staff observations such as the important role of the chief compliance officer, board involvement, annual testing, teamwork across units of the business, and the effective use of technology and service providers. However, the Division also addresses certain areas that fund complexes can improve regarding critical service providers, including more formal monitoring and communication protocols, exams of service provider back-up processes and contingencies, improved coordination of BCPs with service providers' BCPs, and an expanded menu of possible business disruptions.

* * * * *

Because the SEC has addressed BCPs before, many advisers may already be well-prepared. However, the proposed rule contains more specific requirements for BCPs than prior guidance. Accordingly, advisers should review their current BCPs to determine the changes the proposed rule would necessitate.

Footnotes

1. Advisers Act Release No. 4439 ("Proposing Release"). The SEC also released a guidance update, "Business Continuity Planning for Registered Investment Companies," authored by the Division of Investment Management (the "Division").

2. See Compliance Programs of Investment Companies and Investment Advisers, Advisers Act Release No. 2204 (Dec. 17, 2003) (noting "an adviser's fiduciary obligation to its clients includes the obligation to take steps to protect the clients' interests from being placed at risk as a result of the adviser's inability to provide advisory services after, for example, a natural disaster or, in the case of some smaller firms, the death of the owner or key personnel. The clients of an adviser that is engaged in the active management of their assets would ordinarily be placed at risk if the adviser ceased operations.")

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.

Authors
Matthew A. Chambers
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
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

General

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