When an investment adviser is designing its policies and procedures you need to identify the risks for their firm so they address those risks. A big risk is missing an applicable requirement under the regulatory scheme. So you sit down with the regulations and tie them to your specific policies and procedures.
An easy one to miss is the requirement for having a business continuity plan. It’s in Rule 206(4)-7.
Oh, you don’t see anything about business continuity in the rule? It’s not in the rule, it’s in the Release for Rule 206(4)-7:
We believe that an adviser’s fiduciary obligation to its clients includes the obligation to take steps to protect the clients’ interests from being placed at risk as a result of the adviser’s inability to provide advisory services after, for example, a natural disaster or, in the case of some smaller firms, the death of the owner or key personnel. The clients of an adviser that is engaged in the active management of their assets would ordinarily be placed at risk if the adviser ceased operations. [SEC Release No. IA-2204]
There is not much in the release to help you understand what is required, but there are two good places to help you.
One is to look at an intragency paper published by The Federal Reserve Board, the Office of the Comptroller of the Currency and the Securities and Exchange Commission on business continuity objectives. They lay out four broad sound practices for core clearing and settlement organizations and firms that play significant roles in critical financial markets:
- Identify clearing and settlement activities in support of critical financial markets.
- Determine appropriate recovery and resumption objectives for clearing and settlement activities in support of critical markets.
- Maintain sufficient geographically dispersed resources to meet recovery and resumption objectives.
- Routinely use or test recovery and resumption arrangements.
The other source (more practical source) is the disaster recovery requirements of broker/dealers. FINRA Rule 4370 is their emergency preparedness rule. They have a template for small introducing firms to help start designing a plan.
Sources:
- SEC Release No. IA-2204
- Rule 206(4)-7
- FINRA Rule 4370
- Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System SEC Release No. 34-47638
- Investment Adviser Business Continuity Planning
by Scott P. Tarra - Business Continuity Plans (Disaster Recovery Plans) by in Hedge Fund Law Blog