Newly Proposed SEC Rule May Have Far-Reaching Impact on Investment Advisers


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On June 28th, 2016, the SEC proposed a new rule under the Investment Advisers Act of 1940 that would require SEC-registered advisers to adopt, implement and maintain relevant records of business continuity and transition plans. Regulators believe that the rule will minimize client and investor harm during periods of disruption.

Mary Jo White, SEC Chair, said in a statement that, “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.”

What this New Rule Could Mean for Investment Advisers

Proposed rule 206(4)-4 extends beyond the general requirements for business continuity planning (BCP) laid down in rule 206(4)-7 and amends aspects of rule 204-2. Primary actions of the rule include:

  • Prohibiting an SEC-registered investment adviser from providing investment advice unless the adviser adopts and implements a written business continuity and transition plan and reviews that plan at least annually
  • Requiring advisers to make and keep copies of all written business continuity and transition plans that are in effect or were in effect at any time during the last five years
  • Requiring advisers to make and keep copies of any records documenting the adviser’s annual review of its business continuity and transition programs

In addition, the proposed rule would require an adviser’s plan to be based upon the particular risks associated with the adviser’s operations and include policies and procedures addressing the following specified components:

  • Maintenance of systems and protection of data
  • Prearranged alternative physical locations
  • Communication plans
  • Review of third party service providers and a plan of transition in the event the adviser is winding down or is unable to continue providing advisory services

Business continuity and transitions plans would be required to address elements critical to minimizing and preparing for material service disruptions. However, advisers would be permitted to tailor the detail of their plans based upon the complexity of their business operations and the risks associated to their particular business models and activities.

Taking the First Step Toward Compliance

While rule 206(4)-4 is still only under review, transitioning your efforts to account for its potential enactment presents several benefits. Not only will you be prepared for the changes coming down the line, it can also help you provide better service to your clients.

Conducting a review of your current BCP is a great first step toward addressing the changes outlined in the proposed rule. When conducting your review, the Securities Industry and Financial Markets Association recommends that you consider the following questions:

  • Do you know your exposures?
  • Who are your customers and what are their expectations?
  • What is your reliance on critical vendors, including major utilities?
  • What is your reliance on critical infrastructure, broker-dealers, custodians, industry utilities?
  • What functions/operations/products are critical?
  • What are the minimal resources required to maintain the business for a selected time period?
  • What immediately non-critical functions become critical after a given time period?
  • What is the “proximity” risk to your firm (internal and external)?

When reviewing the specific components of the SEC proposal, it is critical to evaluate whether you have implemented a robust transition plan for the firm and conducted full BCP tests for areas of exposure.

Regardless of whether or not the proposed rule is enacted, preparation for the rule can help you—as an investment adviser—become better equipped to deal with business continuity and transition events. While it’s impossible to anticipate or prevent all business impediments, your preparedness will reinforce your commitment to your clients and ensure that you mitigate negative impacts to them caused by business disruptions.

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