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From Securities Regulation Daily, June 28, 2016

SEC proposes investment adviser rules for significant operations disruptions

By Amanda Maine, J.D.

The SEC has proposed a rule which would require SEC-registered investment advisers to adopt and implement written business continuity and transition plans designed to address risks related to a significant disruption in the investment adviser’s operations. The SEC also issued staff guidance addressing business continuity planning for registered investment companies (Adviser Business Continuity and Transition PlansRelease No. IA-4439, June 28, 2016).

Proposed rule. The proposed rule, which is designed to address key events such as natural disasters, cyberattacks, technology failures, and the departure of key personnel, would require the adviser’s plan to be based upon the particular risks associated with its operations and include policies and procedures addressing issues including: 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.

According to SEC Chair Mary Jo White, one of the objectives of the proposed rule is to encourage investment advisers to engage in "advance planning and preparation to help mitigate the effects of disruptions [to its operations] and in some cases, minimize the likelihood of their occurrence."

Investment company guidance. The guidance for investment companies stated that business continuity planning can be highlighted by events of August of 2015 when a systems malfunction at a financial institution prevented it from calculating accurate net asset values for hundreds of mutual funds and exchange-traded funds. The guidance notes that the Division of Investment Management has recently conducted outreach to a number of fund complexes and their advisers regarding business continuity planning.

The guidance advises that while the types of funds and fund complex business models may vary significantly, they generally share certain fundamental operational risks. It noted in particular that disruption plans usually cover the facilities, technology/systems, employees, and activities conducted by the adviser; that a broad cross-section of employees are involved in business continuity planning; and that plan presentations are typically provided to fund boards of directors.

The guidance addresses additional considerations regarding critical service providers, including back-up processes and contingency plans, monitoring incidents and communications protocols, and understanding the interrelationship of their business continuance plans.

The release is No. IA-4439.

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