SEC Proposes Business Continuity & Transition Plan Rule

Investment Management Update

Date: July 06, 2016

On June 28, 2016, the Securities and Exchange Commission (SEC) proposed a new rule that would require SEC-registered investment advisers to adopt and implement written business continuity and transition plans that include certain specific components. Business continuity and transition plans assist advisers in preserving the continuity of advisory services in the event of a temporary or permanent business disruption, such as a natural disaster, cyber-attack, technology failure or departure of key personnel as a result of a merger or a bankruptcy proceeding.

The SEC addressed business continuity planning in a more general way in 2003 when it originally adopted Rule 206(4)-7 (Compliance Program Rule) under the Investment Advisers Act of 1940, as amended (Advisers Act). Under the Compliance Program Rule, advisers must adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act by the firm and its employees. In the release adopting the Compliance Program Rule, the SEC stated that such policies and procedures should address business continuity plans to the extent they are relevant to an adviser. The SEC did not, however, identify critical components of a business continuity plan or discuss specific issues or areas that advisers should consider in developing such plans.

The proposed rule would, by contrast, explicitly require SEC-registered advisers to adopt plans that address both business continuity after a significant business disruption and business transition in the event the adviser is not able to continue providing investment advisory services to clients. The proposed rule would require that a plan be based upon the particular risks associated with the adviser’s operations and include policies and procedures addressing the following specified components: maintenance of systems and protection of data, pre-arranged alternative physical locations, communication plans, review of third-party service providers, and plan of transition in the event the adviser is winding down or is unable to continue providing advisory services. The plans would be required to address these elements, which are critical to minimizing and preparing for material service disruptions, but would permit advisers to tailor the detail of their plans based upon the complexity of their business operations and the risks of their specific business activities. The proposed rule would also require advisers to review the adequacy and effectiveness of their plans at least annually.

In addition to the proposed rule, the SEC proposed amending Advisers Act Rule 204-2 to require that advisers maintain copies of all business continuity and transition plans that were in effect at any time during the last five years, as well as any records documenting their annual review of such plans.

Comments on the proposed reforms are due 60 days after the proposing release is published in the Federal Register.

FOR MORE INFORMATION

For more information, please contact:

Andrew J. Davalla
614.469.3353
Andrew.Davalla@ThompsonHine.com

Craig A. Foster
614.469.3280
Craig.Foster@ThompsonHine.com

Donald S. Mendelsohn
513.352.6546
Don.Mendelsohn@ThompsonHine.com

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