On June 28, 2016, the U.S. Securities and Exchange Commission (the "SEC") proposed new Rule 206(4)-4 (the "Rule") under the Investment Advisers Act of 1940 (the "Advisers Act") that would require an investment adviser registered with the SEC ("RIA") to, among other things: (i) adopt and implement business continuity and transition plans; (ii) conduct an annual review of those plans; and (iii) comply with corresponding recordkeeping requirements.1 Comments on the Rule are due on or before September 6, 2016.
Underlying the Rule is the SEC's view that an RIA's fiduciary duty obligates it to take steps to protect its clients' interests from the potential ramifications of the RIA's temporary or permanent inability to provide advisory services. In proposing the Rule, the SEC sought to protect clients of an RIA from the effects of temporary or permanent operational risks to the RIA such as natural disasters, cyber-attacks, acts of terrorism, technology failures and the departure of key personnel. The Rule also seeks to protect clients from operational risks associated with events such as a sale, asset transfer or wind-down of the RIA's operations. The SEC has acknowledged that the scope of an RIA's policies and procedures under the Rule will depend on the size and nature of an RIA's business; the Rule nonetheless establishes a set of specific elements that need to be included in an RIA's business continuity and transition plan. In setting out greater specificity for policies and procedures covering business continuity and transition plans, the SEC appears to have concluded that the requirements of Rule 206(4)-7 under the Advisers Act are not sufficient with respect to those plans.2 In this regard, the SEC noted the observations of its examination staff that existing plans undertaken in accordance with Rule 206(4)-7 are "uneven and, in some instances, may not be sufficiently robust to mitigate the potential adverse effects of a significant business disruption on clients."3
At the same time that the SEC proposed the Rule, the SEC staff published guidance related to business continuity considerations for investment companies registered under the Investment Company Act of 1940 (the "1940 Act") indicating that registered investment company complexes should evaluate their response to significant business disruptions affecting both internal operations and critical third-party service providers.4 According to the guidance, an investment company's ability to continue operations during a business continuity event should be considered part of the company's compliance obligations under 1940 Act Rule 38a-1. MORE