SEC Speaks Loudly on Business Continuity Plans

On June 28, 2016 the SEC’s Division of Investment Management (IM) released new guidance for registered investment companies regarding Rule 38a-1 (Compliance Rule) and its implications for fund Business Continuity Plans (BCP).This new guidance was released the same day as proposed Rule 206(4)-4 for registered investment advisers requiring written BCPs with transition plans. Transition plans are utilized when a firm or fund must cease operations due to unforeseen events. This ComplianceAlert focuses on the guidance from IM that will have an immediate impact on funds. Registered investment advisers should be prepared for similar measures if Rule 206(4)-4 is finalized.

The concept of a BCP is not new to the asset management industry. Funds were required to implement BCPs as part of their compliance program since at least 2004 with the advent of the Compliance Rule.

The new fund guidance focuses on the critical role that fund service providers play in the overall compliance program. Fund service providers deemed most crucial are:

  • Investment Adviser(s)
  • Custodian(s)
  • Fund Administrator
  • Transfer Agent
  • Principal Underwriter

Fund BCPs should cover the critical areas addressed by each of the above service provider types. Of importance, the IM guidance states that the following service provider issues must be addressed in fund BCPs:

  • Service provider backup processes and redundancies
  • Service provider monitoring of specific incident types and communication protocols when an incident occurs
  • Service provider interrelationships (among each other and with the fund) to identify specific risks that could flow across service providers (i.e., NAV calculation data feeds)
  • Specific scenario analysis that addresses actual potential events

Fund boards also have a role to play in that they should be made aware of the specific risks posed by service providers in the event of a service provider disruption. This will mean additional board reporting regarding service providers’ BCPs.

View SEC IM Guidance Update, “Business Continuity Planning for Registered Investment Companies,” June 2016.

View SEC Proposal Release No. IA-4439, “Adviser Business Continuity and Transition Plans,” June 28, 2016.