The Securities and Exchange Commission had indicated that it was going to tackle operational issues at investment advisers. It just released a proposed rule on business continuity and transition plans for registered investment advisers. The proposed rule would require SEC-registered investment advisers to have written business continuity and transition plans reasonably designed to address operational and other risks related to a significant disruption in the investment adviser’s operations.
First some stats. According to the release:
“[T]here are approximately 12,000 investment advisers registered with the Commission that collectively manage over $67 trillion in assets, an increase of over 140% in the past 10 years.” – Based on data from IARD as of 1/4/2016
The SEC is proposing a new Rule 206(4)-4 that makes it unlawful for registered investment advisers to provide investment advice unless it has a written business continuity plan and transition plan that is reviewed at least annually.
The easy one is business continuity planning requirement. That requirement was tucked into the release for Rule 206(4)-7. It should not come as a surprise to fund managers and investment advisers that they should have a continuity plan. The SEC has found many BCPs are inconsistent and lacking robustness across those 12,000 advisers.
The SEC is requiring that a BCP have at least the following elements:
- maintenance of critical operations and systems, and the protection, backup, and recovery of data
- pre-arranged alternate physical location(s) of the adviser’s office(s) and/or employees;
- communications with clients, employees, service providers, and regulators;
- identification and assessment of third-party services critical to the operation of the adviser.
The transition plan is a bit trickier and much more vague. Frankly, in my opinion, I don’t think the two should be included in the same rule.
The transition plan covers a broad swath of possibilities. The pool of registered investment advisers is very broad, from small retail investment advisers, large financial services companies and private fund managers. The SEC alludes to the “resolution plans” in Dodd-Frank, a/k/a the living wills.
These are the five elements the SEC is looking for in the transition plan:
- 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;
- the 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.
I think the transition plan is very important for a small retail adviser that is reliant on a single person. I think it’s a bit tougher to see how this would work for a medium-sized or larger private fund manager that is not reliant on a single person or a few people to safeguard and manage the fund assets.
Hopefully, the SEC will carve out the transition plan to a separate rule for a longer and more thoughtful rule-making process.
The business continuity part of the rule is no-brainer. Frankly it’s long over due to have been elevated from a paragraph in s rule release to a its own rule.
Sources: