Business Continuity and Transition Plans for RIAs

The Securities and Exchange Commission (“SEC”) recently proposed a new rule that would require registered investment advisers (“RIAs”) to adopt and implement written business continuity and transition plans.  The proposed rule is designed to ensure that RIAs have plans in place to address operational and other risks related to a significant disruption in the adviser’s operations in order to minimize client and investor harm.

“While an adviser may not always be able to prevent significant disruptions to its operations, advance planning and preparation can help mitigate the effects of such disruptions and in some cases, minimize the likelihood of their occurrence, which is an objective of this rule,” said SEC Chair Mary Jo White. “This is the latest action in the Commission’s efforts to modernize and enhance regulatory safeguards for the asset management industry, which includes rules previously proposed that would modernize the information reported to the Commission and investors, enhance fund liquidity management, and strengthen the regulation of funds’ use of derivatives.”

Karen Barr, president and CEO of the Investment Adviser Association, noted that while IAA had just begun to review the proposal, “we are encouraged that the proposed rule is principles-based and would allow each investment advisory firm to tailor its business continuity and transition plan as appropriate for its own business model.”

The SEC states that business continuity and transition plans would assist RIAs in preserving the continuity of advisory services in the event of business disruptions – whether temporary or permanent – such as a natural disaster, cyber-attack, technology failures, the departure of key personnel, and similar events.

As proposed, the rule would require an RIA’s plan to be based upon the particular risks associated with the RIA’s operations and include policies and procedures addressing the following:

  • 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 RIA is winding down or is unable to continue providing advisory services.

The plans would be required to address these elements that are critical to minimizing and preparing for material service disruptions, but would permit RIAs to tailor the detail of their plans based upon the complexity of their business operations and the risks attendant to their particular business models and activities.

The proposed rule would also require RIAs to review the adequacy and effectiveness of their plans at least annually and to maintain certain related books and records.

The North American Securities Administrators Association (“NASAA”) adopted its model rule for business and succession plans last April, which, while not mandatory, provides a roadmap for those states that choose to regulate succession planning for advisors.

For more information, please refer to the proposal language published on the SEC’s website and in the Federal Register.  The comment period will be 60 days after publication in the Federal Register.

For more posts regarding a Business Continuity Plan, please see Business Continuity-Weather-Related Events, Business Continuity Plam: Pandemic Preparedness, and Loss of Key Personnel: How to Prepare.

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