SEC Proposes Rules to Require Investment Advisers to Adopt Business Continuity and Transition Plans | Practical Law

SEC Proposes Rules to Require Investment Advisers to Adopt Business Continuity and Transition Plans | Practical Law

The SEC proposed rules that would require registered investment advisers to adopt and implement written business continuity and transition plans reasonably designed to address operational and other risks related to a significant disruption in the investment adviser's operations.

SEC Proposes Rules to Require Investment Advisers to Adopt Business Continuity and Transition Plans

by Practical Law Corporate & Securities
Published on 30 Jun 2016 • USA (National/Federal)
The SEC proposed rules that would require registered investment advisers to adopt and implement written business continuity and transition plans reasonably designed to address operational and other risks related to a significant disruption in the investment adviser's operations.
On June 28, 2016, the SEC issued proposed rules that would require investment advisers registered under the Investment Advisers Act of 1940 (Advisers Act) to adopt and implement written business continuity and transition plans reasonably designed to address operational and other risks related to a significant disruption in the investment adviser's operations. Under the proposal, a business continuity and transition plan would need to cover policies and procedures concerning:
  • Business continuity after a significant business disruption. Business continuity situations would generally include:
    • natural disasters;
    • acts of terrorism;
    • cyber-attacks;
    • equipment or system failures; or
    • unexpected loss of a service provider, facilities, or key personnel.
  • Business transition in the event the investment adviser is unable to continue providing investment advisory services to clients. Business transitions generally would include situations where the adviser exits the market and is no longer able to serve its clients, including when it:
    • merges with another adviser;
    • sells its business or a portion of its business; or
    • in unusual circumstances, enters bankruptcy proceedings.
The proposed rules would require a business continuity and transition plan to include policies and procedures designed to minimize material service disruptions, including policies and procedures that address:
  • Maintenance of critical operations and systems, and the protection, back-up, and recovery of data.
  • Pre-arranged alternate physical locations of the adviser's office and employees.
  • Communications with clients, employees, service providers, and regulators.
  • Identification and assessment of third-party services critical to the operation of the adviser.
  • 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 services.
The proposal would require that the plan be reasonably designed to address the operational and other risks of an adviser. As a result, advisers would only need to take into account the risks associated with its particular operations, including the nature and complexity of the adviser's business, its clients, and its key personnel.
In addition, the proposal would:
  • Establish new rule 206(4)-4 under the Advisers Act to make it unlawful for an SEC-registered investment adviser to provide investment advice unless the adviser adopts and implements a written business continuity and transition plan and reviews that plan at least annually.
  • Amend rule 204-2 under the Investment Advisers Act to require registered investment advisers to make and keep all business continuity and transition plans that are currently in effect or that were in effect at any time within the past five years, as well as any records documenting the adviser's annual review of its business continuity and transition plan.
In addition to the proposal, the SEC staff issued related guidance addressing business continuity planning for registered investment companies, including the oversight of the operational capabilities of key fund service providers.
The SEC is accepting comments on the proposed rules until 60 days after publication in the Federal Register.
To learn more about the regulation of investment advisers, see Practice Note, Investment Adviser Regulation: Overview.