Calfee, Halter & Griswold LLPSEC Calls for Adoption of Robust Business Continuity and Transition Plans By Investment Advisers

July 1, 2016

Investment advisers registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 have generally included as part of their compliance policies and procedures “business continuity plans” intended to mitigate the risks of business disruptions, and to protect client interests from being placed at risk as a result of situations adversely impacting the ability of the adviser to provide continuing advisory services.

Such plans and procedures to a lesser extent may also address transitioning the management of client portfolios to another investment adviser if necessary. Concerned, however, that investment adviser plans and procedures in place vary widely, and some are not sufficiently robust to address and mitigate operational risks to which clients may be subjected in times of stress and business disruption, on June 28, 2016 the U.S. Securities and Exchange Commission (SEC) announced a rule proposal to require all SEC registered investment advisers to adopt and implement written business continuity and transition plans that include certain specific components in order to facilitate robust business continuity and transition planning.

As for transition planning, the proposed rule would mandate that advisers have a plan of transition that specifically accounts for the possible winding down of the adviser’s business, or the transition of the adviser’s business to others, in the event the adviser is unable to continue providing advisory services. The newly proposed rule is part of a larger on-going SEC initiative aimed at modernizing and enhancing regulatory safeguards for the investment management industry. The SEC has concluded that all investment advisers share certain fundamental operational risks arising from internal and external business continuity events. The overall concern is that all SEC registered investment advisers must have operational procedures and policies that manage the risks associated with business continuity and transition, and which increase the likelihood that clients are not harmed in the event of a significant disruption in their adviser’s operations.

The proposed SEC Rule --Rule 206(4)-4 under the Investment Advisers Act of 1940-- would make it unlawful for an SEC registered investment adviser to provide investment advice unless the adviser adopts and implements a written business continuity and transition plan addressing all required elements, and reviews that plan at least annually. The Rule proposal, which now proceeds to a comment period, has implications outside the asset management industry. For example, investment fiduciaries who regularly engage investment advisers and managers, such as trustees for ERISA plans or private foundations, should also take note. As part of their fiduciary responsibilities in selecting and monitoring outside advisers, investment fiduciaries must be aware of their advisors’ business continuity and transition plans and, if the proposed SEC rule becomes final, be in a position to assess the content and effectiveness of those plans relative to their own requirements and expectations in the event of a disruption in their advisers’ operations.

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For additional information and discussion on this topic, please get in touch with your regular Calfee contact or the Securities attorney listed below: Robert N. Rapp 216.622.8288 rrapp@calfee.com Steven W. Day 216.622.8458 sday@calfee.com  

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