On June 28, 2016, the SEC proposed Rule 206(4)-4 under the Advisers Act that would require all SEC registered investment advisers to adopt and implement written business continuity and transition plans, including certain specific components, that are reasonably designed to address risks related to a significant disruption in the adviser’s operations. The proposed rule is intended to help ensure that an adviser’s policies and procedures minimize material service disruptions and any potential client harm from such disruptions. The SEC also proposed an amendment to Rule 204-2 under the Advisers Act, imposing certain record-keeping requirements regarding an adviser’s business continuity and transition plans.
Proposed Rule 206(4)-4
Under the proposed rule, it would be unlawful for an SEC-registered adviser to provide investment advice unless the adviser adopts and implements a written business continuity and transition plans and reviews those plans at least annually. These plans must include policies and procedures concerning: (1) business continuity after a significant business disruption, and (2) business transition in the event the adviser is unable to continue providing investment advisory services to clients. The proposing release states that business continuity situations generally include “natural disasters, acts of terrorism, cyber-attacks, equipment or system failures, or unexpected loss of a service provider or key personnel.” Business transitions are described generally as including “situations where the adviser exits the market and thus is no longer able to serve its clients, including when it merges with another adviser, sells its business or a portion thereof, or in unusual situations, enters bankruptcy proceedings.”
As proposed, an adviser’s plan would be based upon the risks associated with the adviser's operations and specifically must address: (1) maintenance of critical operations and systems, and the protection, backup, and recovery of data; (2) pre-arranged alternate physical location(s) of the adviser’s office(s) and/or employees; (3) communications with clients, employees, service providers and regulators; (4) identification and assessment of third-party services critical to the operation of the adviser; and (5) 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 proposed release states that while an adviser’s plan must address the foregoing components, “the degree to which an adviser’s plan addresses a required component will depend upon the nature of each particular adviser’s business.”
Annual Review. As noted, the proposed rule would also require each adviser to review the adequacy of its business continuity and transition plan on at least an annual basis, including a review of the adviser’s effectiveness in implementing the plan. The annual review should: (1) consider other regulatory changes and changes to the adviser’s business that might suggest a need to revise the plan; and (2) address any weaknesses identified through prior testing, assessments or instances where the plan had to be carried out.
Proposed Amendment to Rule 204-2
Under the proposed amendment to Rule 204-2, advisers would be required to maintain copies of all written business continuity and transition plans that are in effect or were in effect at any time during the last five years after the compliance date of the amendment. Each adviser would also be required to maintain records documenting the annual review of its business continuity and transition plans that would be required by proposed Rule 206(4)-4.
Comments on the proposal must be submitted on or before September 6, 2016.
A copy of the proposing release is available at: https://www.sec.gov/rules/proposed/2016/ia-4439.pdf.