Earlier this week, the SEC issued a Press Release announcing a Rule Proposal that would require SEC-registered investment advisers to adopt written business continuity and transition plans (BCP) as part of their compliance program. The comment period on the Rule Proposal is expected to close in September. Under the proposed rule, an adviser’s written BCP will be expected to address situations including continuity in the event of a significant business disruption as well as transition of business if the adviser is unable to continue to provide advisory services and, much like an adviser’s compliance program itself, the adequacy of the BCP and the effectiveness of its implementation will be required to be reviewed at least annually. Although Chair White acknowledged that advisers “may not always be able to prevent significant disruptions to [their] operations,” the BCP will be expected to be tailored to the risks inherent in the adviser’s business and be designed to minimize material service disruptions. Specifically, under the proposed rule, advisers will be expected to focus on:
- Maintenance of critical operations and system and protection of data;
- Alternative physical operational locations;
- Communications, including with regulators as well as clients and others;
- ID and assessment of critical third-party services;
- Plans of transition in the event of winding down or cessation of advisory services, including addressing: safeguarding and transfer of client assets; prompt generation of client-specific transition information; governance structure of the adviser; material financial resources available to the adviser; and assessing law and contractual obligations governing the adviser and client accounts.
While many advisers have long had BCPs, this Rule, if adopted, will make a failure to have an annually reviewed written BCP a violation of securities laws.