Business Continuity and Transition Planning for Asset Managers: SEC Proposes Rule for All Registered Investment Advisers; Staff Issues Guidance Update for Registered Investment Companies

Sullivan & Cromwell LLP - July 7, 2016
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On June 28, 2016, the SEC proposed new Rule 206(4)-4 and amendments to Rule 204-2 under the Investment Advisers Act of 1940 that would require all SEC-registered investment advisers to formally adopt and implement business continuity and transition plans (or BCTPs).  Under the proposed rule (the “BCTP Proposal”), BCTPs must be “reasonably designed to address operational and other risks related to a significant disruption in the investment adviser’s operations” and would include steps for dealing with cyberattacks, physical dislocations and the unexpected loss of critical service providers or key personnel, among other things.

In principle—and as the proposing release itself frequently notes—the BCTP Proposal would not necessarily require a dramatic expansion in operational risk management practices, especially for large investment advisers with sophisticated clients whose due diligence already focuses on these practices.  Even these advisers, however, will need to undertake a careful review of the requirements and expectations associated with the BCTP Proposal and the changes that could be needed at their firms.  Furthermore, the BCTP Proposal requests comment on a number of questions, including whether BCTPs should be publicly disclosed, should require reporting of relevant incidents to the SEC or should be subject to stress-testing.  Such provisions in a final rule could affect the character and practical significance of the BCTP.

Comments on the BCTP Proposal are due by September 6, 2016.

Also on June 28, the SEC’s Division of Investment Management provided a related guidance update on business continuity planning for registered investment companies (the “Guidance Update”), which is summarized in the link below.