SEC Proposes New Rule Requiring Registered Investment Advisers to Establish Business Continuity and Transitions Plans

29 June 2016 Publication
Author(s): Christopher J. Babcock Evan D. Stone

Yesterday, the Securities and Exchange Commission (“the SEC”) proposed new rules under the Investment Advisers Act of 1940 (“the Advisers Act”) which would require registered investment advisers to adopt and implement written business continuity and transition plans.1  Specifically, the proposed rules call for advisers to adopt written policies and procedures, contained in one or more documents, concerning “(i) [b]usiness continuity after a significant business disruption; and (ii) [b]usiness transition in the event the investment adviser is unable to continue providing investment advisory services to clients,” which policies and procedures would be tailored to the risks associated with each adviser’s operations.

The SEC indicated its view that investment advisers are presently required, as a matter of their fiduciary duties to investors, “to take steps to protect client interests from being placed at risk as a result of the adviser’s inability to provide advisory services.”  While the SEC has previously indicated that an investment advisor’s compliance policies and procedures required under Advisers Act Rule 206(4)-7 “should address [business continuity plans] to the extent that they are relevant to [such] adviser,”2  previous rules did not specify the key components of such a plan or call for advisers to maintain a transition plan in addition to a business continuity plan.

The proposed rule would require business continuity plans to address, at a minimum, the adviser’s policies and procedures concerning “(i) [m]aintenance of critical operations and systems, and the protection, backup, and recovery of data, including client records; (ii) [p]re-arranged alternate physical location(s) of the adviser’s office(s) and/or employees; (iii) [c]ommunications with clients, employees, service providers, and regulators; [and] (iv) [i]dentification and assessment of third-party services critical to the operation of the adviser.”  Transition plans complying with the rule would need to account for the winding down or transition to others of an adviser’s business, and include “(A) [p]olicies and procedures intended to safeguard, transfer, and/or distribute client assets during transition; (B) [p]olicies and procedures facilitating the prompt generation of any client-specific information necessary to transition each client account; (C) [i]nformation regarding the corporate governance structure of the adviser; (D) [i]dentification of any material financial resources available to the adviser; and (E) [a]n assessment of the applicable law and contractual obligations governing the adviser and its clients, including pooled investment vehicles, implicated by the adviser’s transition.”  Investment advisers would be required to review such plans annually and to retain copies of all such plans for at least five years.

The SEC has submitted the rule for public notice and comment, and has specifically requested comments concerning whether any advisers should be exempted from the rule, how the rule should interact with FINRA, CFTC or other rules concerning business continuity plans, whether all identified components of such plans should be applicable to each adviser, whether such plans should be required to be disclosed to clients or the SEC, and other matters relevant to the proposed rule.  The deadline to submit commits is 60 days after publication of the proposed rule in the Federal Register.

1Adviser Business Continuity and Transition Plans, Advisers Act Rel. No. 4439 (June 28, 2016) (the “Release”), available at All quotations herein are to the Release unless otherwise indicated.
2Release; see also Compliance Programs of Investment Companies and Investment Advisers, Advisers Act Rel. No. 2204 (Dec. 17, 2003) at n.22.


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