SEC Says Investment Advisers Need to Think About Transition Planning

The Securities and Exchange Commission (“SEC”) recently issued proposed Rule 206(4)-4 under the Investment Advisers Act of 1940, as amended (“Advisers Act”), requiring registered investment advisers to have written plans addressing business continuity and transition (wind down) steps in the event of significant business disruptions. The proposal appears consistent with current requirements for other financial institutions including FINRA Rule 4370 for broker-dealers, CFTC Rule 603 for CFTC registrants, and NASAA model Rule 203(a)-1A for state-registered investment advisers.

Historically, the SEC has explicitly cited having a business continuity plan as a critical element of a compliance program under Rule 206(4)-7 of the Advisers Act. However, the SEC has noted certain weaknesses in business continuity planning by SEC registered investment advisers and is proposing the new rule to ensure they “address operational and other risks related to a significant disruption in the investment adviser’s operations.”

In addition to the proposed new rule, the SEC is proposing amendments to Rule 204-2 of the Advisers Act to require advisers to retain all versions of their business continuity and transition plan (“BCTP”), along with documentation of annual review of its BCTP for five years.

IM Guidance to Registered Investment Companies

Concurrent with the proposed new rule for investment advisers, the SEC Division of Investment Management issued guidance on business continuity planning for Registered Investment Companies under Rule 38(a)-1.


We Can Help

In light of the SEC’s proposed rule, advisory firms should consider performing an assessment of the resiliency of their operations and determine if their current business continuity/succession planning is adequately designed to include transitional steps should the firm no longer be able to continue its business.  Core Compliance & Legal Services, Inc. can assist with performing assessments and working with firms to enhance their current plans.  For further information or if you have any questions, please contact us at (619) 278-0020.

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