SEC Proposes Business Continuity Rules
The Security and Exchange Commission (“SEC”) has issued a request for comments on it’s proposed rules requiring Investment Advisors to prepare and maintain Business Continuity and Transition Planning. Over the past few years, the SEC has noticed a disparity among Investment Advisors in their Business Continuity planning. Some have very robust programs, while others do not and often face interruptions in their operations. With these new rules, the SEC is looking to change all that.
The SEC reasons that 15 USC § 80b6 (“Prohibited Transactions by Investment Advisors”) and the adviser’s fiduciary duty makes an adviser’s representation of a client tantamount to fraud, if they have not taken reasonable steps to develop and maintain a Business Continuity Plan. Many other areas of the finical industry require that their regulated parties have Business Continuity Plans. In fact, the Financial Regulatory Authority (“FINRA”), Commodity Futures Trading Commission (“CFTC”) require their regulated parties to maintain Business Continuity Plans. The North American Securities Administrator Association (“NASAA”) has even published a model rule that requires such Business Continuity Plans for Investment Advisors in adopting states. So bottom line, this has been starting to develop for some time.
There are two rules that are being proposed (one amended and one added). Essentially, §275.204-2 is being amended to add verbiage for Business Continuity Planning and the timeframe records need to be maintained for. The whole new section (which was previously reserved for expansion after that section was repealed) is §275.205(4)-4. Here is what that section currently looks like:
§ 275.206(4)–4 Investment adviser business continuity and transition plan.
(a) Prohibition. If you are an investment adviser registered or required to be registered under section 203 of the Act (15 U.S.C. 80b–3), it shall be unlawful within the meaning of section 206 of the Act (15. U.S.C. 80b– 6) for you to provide investment advice to your clients unless you:
(1) Business continuity and transition plan. Adopt and implement a written business continuity and transition plan; and
(2) Annual review. Review, no less frequently than annually, the adequacy of the business continuity and transition plan and the effectiveness of its implementation.
(b) Content of business continuity and transition plan.
(1) For purposes of this section, the term business continuity and transition plan means policies and procedures reasonably designed to address operational and other risks related to a significant disruption in the investment adviser’s operations, including policies and procedures concerning:
(i) Business continuity after a significant business disruption; and
(ii) Business transition in the event the investment adviser is unable to continue providing investment advisory services to clients.
(2) The content of a business continuity and transition plan shall be based upon risks associated with the adviser’s operations and shall include policies and procedures designed to minimize material service disruptions, including policies and procedures that address the following:
(i) Maintenance of critical operations and systems, and the protection, backup, and recovery of data, including client records;
(ii) Pre-arranged alternate physical location(s) of the adviser’s office(s) and/ or employees;
(iii) Communications with clients, employees, service providers, and regulators;
(iv) Identification and assessment of third-party services critical to the operation of the adviser; and
(v) Plan of transition that accounts for the possible winding down of the investment adviser’s business or the transition of the investment adviser’s business to others in the event the investment adviser is unable to continue providing investment advisory services, that includes the following:
(A) Policies and procedures intended to safeguard, transfer, and/or distribute client assets during transition;
(B) Policies and procedures facilitating the prompt generation of any client-specific information necessary to transition each client account;
(C) Information regarding the corporate governance structure of the adviser;
(D) Identification of any material financial resources available to the adviser; and
(E) An assessment of the applicable law and contractual obligations governing the adviser and its clients, including pooled investment vehicles, implicated by the adviser’s transition.
In addition, the SEC provides a very in-depth reasoning and analysis of what they are seeking to do. Even more, they have specific questions they want to get feedback from the field on centered around what the impacts of a regulation like this would be.