SEC Proposes New Rule Governing Business Continuity Plans SEC Proposes New Rule Governing Business Continuity Plans

SEC Proposes New Rule Governing Business Continuity Plans

On June 28, 2016, the Securities and Exchange Commission (“SEC”) proposed a new rule governing business continuity plans (“BCP”) for investment advisers.[1]  If enacted, the Proposed Rule will require investment advisers to adopt, and annually review, written BCPs in order to provide investment advice.  Failure to do so will constitute a violation of §206 of the Advisers Act.

The proposed rule would be promulgated under Sections 204, 206(4), and 211(a) of the Advisers Act.  The SEC stated in its release that the proposed rule is derived from advisers’ fiduciary obligations to their clients; specifically, protecting their “clients’ interests from being placed at risk as a result of the adviser’s inability to provide advisory services.”

Requirements of the Proposed Rule: Create a Written Business Continuity Plan.

Pursuant to the Proposed Rule, investment advisers will be required to adopt a written BCP that is “reasonably designed to address operational and other risks related to a significant disruption in an adviser’s operations and that addresses certain specified components.”
Specifically, these plans should address two possible eventualities (1) business continuity after a significant business disruption, and (2) a business transition in the event the adviser is unable to continue providing investment advisory services to its clients.

Planning for Disruption: What Should a Business Continuity Plan Actually Plan For?

The Proposed Rule would require advisers to adopt BCPs that dealt with, at a minimum, the following five issues.

  1. Maintenance of critical operations and systems, and the protection, backup, and recovery of data. The Proposed Rule would require an adviser’s BCP to identify and prioritize critical functions, operations, and systems, and identify alternatives and redundancies.   For example, advisers should plan for how to address systems outages for trading, allocation, transaction clearance and settlement, and processing of portfolio securities, and how to maintain access to client accounts in the event of a disruption.  In addition to ensuring the functionality of virtual and financial systems, an adviser’s BCPs should review human systems and identify which key personnel provide critical functions to the adviser, and plan for a temporary or permanent loss of such an employee.  Finally, advisers should also address data backup for both electronic and hard data.
  2. Pre-arranged alternate physical location(s) of the adviser’s office(s) and/or employees. Under the Proposed Rule, advisers will be required to plan for disruptions to the adviser’s physical place of business.  The SEC staff noted that, where the adviser has only one office, it may be beneficial to establish a satellite office in another location or geographic region to ensure continuous functionality in the event of a disruption.
  3. Communications with clients, employees, service providers, and regulators. The Proposed Rule would require advisers to a create BCP that includes a communications plan.  This communications plan would direct employees in the event of a disruption and explain when and how the adviser’s clients will be informed of significant business disruptions.  Likewise, the communications plan would describe how service providers would be advised of significant disruptions.  Finally, the Proposed Rule requires advisers to include contact information for the relevant regulator or regulators.
  4. Identification and assessment of third-party services critical to the operation of the adviser. The Proposed Rule would require advisers to identify its critical third-party vendors and determine what to do if those vendors failed.  Moreover, the SEC staff noted that, as part of an adviser’s BCP, the adviser should determine whether its critical vendors also have BCPs, and consider replacing vendors that do not have their own BCPs.  Finally, the SEC staff noted that advisers often arrange service providers to work with clients as part of the advisers’ sponsoring role.  In such situations, the adviser should review and assess how the critical service providers it arranges for, or oversees, plan for their own business continuity.
  5. Create a transition plan.Under the Proposed Rule, advisers must plan for a possible transition.  The transition plan should account 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 Proposed Rule analogized this requirement to the Dodd-Frank’s living will requirement.  Each adviser’s transition plan must contain:
  • Policies and procedures intended to safeguard, transfer, and/or distribute client assets during transition;
  • Policies and procedures facilitating the prompt generation of any client-specific information necessary to transition each client account;
  • Information regarding the corporate governance structure of the adviser;
  • Identification of any material financial resources available to the adviser; and
  • 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.
Enforcement Actions: Possible Penalties for Not Adopting a Business Continuity Plan.

Finally, under the Proposed Rule, it would be a violation of §206 Advisers Act for an adviser to provide investment advice unless it adopted and implemented a written business continuity and transition plan and reviewed the plan annually.

For more information on the Proposed Rule, contact Daniel Culicover, Matt Fornshell or a member of our Litigation practice.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

[1] “Adviser Business Continuity and Transition Plans,” Advisers Act Release No. 4439 (June 28, 2016) (the Release), available at:

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