United States: SEC Proposes New Rule Requiring Investment Advisers To Adopt Business Continuity And Transition Plans And Issues Guidance On Business Continuity Plans For Registered Investment Companies

A rule proposed by the US Securities and Exchange Commission under the Investment Advisers Act of 1940 would require SEC-registered investment advisers to adopt and implement written business continuity and transition plans and review them at least annually.1 While nearly all firms already maintain business continuity plans, the proposal suggests baseline requirements that the SEC would expect for such plans. And the proposal's requirement that the plans address "transition"—meaning sale or dissolution—of the investment adviser's business is entirely new. In a companion release, the SEC also issued guidance to registered investment companies regarding components of their business continuity plans.2

Public comments on the proposal are due with the agency 60 days from the proposal's publication in the Federal Register. The Investment Company Act guidance is not a rule, so is effective automatically.


The SEC believes that, as part of an investment adviser's fiduciary duty owed to its clients, the firm is 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. This was articulated previously in connection with the agency's adoption of its general compliance rules for investment advisers in 2003 (Rule 206(4)-7 for registered investment advisers and Rule 38a-1 under the Investment Company Act of 1940 for registered investment companies). The agency also emphasized the importance of business continuity plans (BCPs) following the September 11, 2001 terrorist attacks, Hurricanes Katrina and Sandy and as part of its recent cyber examinations.

The current rulemaking, however, is more than a roundup of 15 years of BCP learning. It also has to be understood in context. SEC Chair Mary Jo White is on a mission to complete the ambitious rulemaking agenda she outlined in December 2014, in which she promised enhanced data reporting by asset managers, liquidity and derivatives rules for registered investment companies and asset manager transition planning and stress testing.3 With the current rulemaking ticking off transition planning, and four previous proposals put out between May 2015 and June 20164, only a stress testing proposal remains outstanding. Also, hanging over all of this is the ongoing interplay between the SEC and the banking regulators. Transition planning reflects a common playbook and clearly owes its genesis to the "living wills" required of banks in the post Dodd-Frank era.

Proposed Requirements

The proposed rule would require SEC-registered investment advisers to adopt and implement written policies and procedures designed to address operational and other risks related to a significant disruption in the adviser's operations. The plan would be required to include:

  • Business continuity after a significant business disruption such as a natural disaster, act of terrorism, cyber- attack, equipment or system failure, or unexpected loss of a service provider, facilities or key personnel; and
  • Business transition in the event the investment adviser is unable to continue providing investment advisory services to clients as a result of its exit from the market, including when it merges with another adviser, sells its business or dissolves.

Acknowledging the differences of business models among advisers, the SEC notes that plans should be tailored to the specific risks an adviser's business faces and that size and complexity of firms will drive different outcomes. But the rule proposal includes a laundry list of components that the SEC expects to see, among them:

Maintenance of Critical Operations and Systems, and the Protection, Backup and Recovery of Data, Including Client Records.

  • Advisers should identify and prioritize critical functions, operations and systems that are utilized for prompt and accurate processing of portfolio securities transactions on behalf of clients, including the management, trading, allocation, clearance and settlement of transactions, and those that are critical to the valuation and maintenance of client accounts, access to client accounts and the delivery of funds and securities. This typically will include identification and assessment of third-party service providers that may support some of these functions.

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1  The SEC Proposing Release is available at https://www.sec.gov/rules/proposed/2016/ia-4439.pdf

2 The BCP Guidance is available at http://www.sec.gov/investment/im-guidance-2016-04.pdf

3 Chair White's December 2014 speech is available at https://www.sec.gov/News/Speech/Detail/Speech/1370543677722

4 See the following Client Publications for further information on those proposals: SEC Issues Proposed Investment Company Reporting Rules (May 2015) http://www.shearman.com/~/media/Files/NewsInsights/Publications/2015/05/SEC-Issues-Proposed-Investment-Company-Reporting-Rules-IF 052915.pdf

SEC Issues Proposed Investment Adviser Reporting and Disclosure (May 2015) http://www.shearman.com/~/media/Files/NewsInsights/Publications/2015/05/SEC-Issues-Proposed-Investment-Adviser-Reporting-and-Disclosure-Rules-IF052915.pdf

Significant SEC Rulemaking to Address Liquidity of Mutual Fund Portfolios (October 2015) http://www.shearman.com/~/media/Files/NewsInsights/Publications/2015/10/Significant-SEC-Rulemaking-to-Address-Liquidity-of-Mutual-Fund-Portfolios-IF-100215.pdf

SEC Proposes New Derivatives Rules for Registered Funds (January 2016) http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/01/SEC-Proposes-New-Derivatives-Rules-for-Registered-Funds-and-BDCs-AM-011116.pdf

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.

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