SEC Proposed Rule on Business Continuity and Transition Plans Explained

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We are pleased to have AdvisorAssist – an industry leading compliance consulting firm for RIAs contribute to From the Corner Office to help us better understand the SEC proposed rule that would require RIAs to adopt written business continuity plans.  Michael D. Conlon, JD is Vice President Advisor Compliance / General Counsel and Brendan Furey is Senior Compliance Consultant & Associate Counsel for AdvisorAssist.


On June 28th, 2016 the Securities and Exchange Commission submitted for publication in the Federal Register a proposed rule that would require registered investment advisors to adopt and implement written business continuity and transition plans. The proposed rules amend Rule 204-2 and create new Rule 206(4)-4, which would make it unlawful for an SEC-registered investment advisor to provide investment advice unless the advisor adopts and implements a written business continuity and transition plan and reviews that plan at least annually. If adopted by the SEC the final rules could go into effect as early as the middle part of 2017. The proposed rules are out for public comment and to submit a comment you can use the SEC’s Internet submission form.

The written business continuity and transition plans would consist of policies and procedures that address the following: (i) maintenance of critical operations and systems, and the protection, backup, and recovery of data; (ii) pre-arranged alternate physical location(s) of the advisor’s office(s) and/or employees; (iii) communications with clients, employees, service providers, and regulators; (iv) identification and assessment of third-party services critical to the operation of the advisor; and (v) a plan to transition accounts for the possible winding down of the advisor’s business or the transition of the advisor’s business to others in the event the advisor is unable to continue providing advisory services.

An advisor’s fiduciary duty obligates it to take steps to protect client interests from being placed at risk in the event of the advisor winding down or its inability to provide advisory services. Based on this component of an advisor’s fiduciary duty the proposed rule would deem it to be fraudulent and deceptive for an advisor to hold itself out as providing advisory services unless it has defined a transition plan. The SEC believe that business continuity and transition plans may minimize an advisor’s exposure to operational risks and disruptions, which in turn may lessen any potential impact on the broader financial markets. The written business continuity and transition plans are to be tailored to the risks associated with each advisor’s individual operations because SEC examiners have found that one of the main issues is what they describe as inconsistent robustness of written business continuity and transition plans.

Elements of a transition plan
A transition plan should account for the possible winding down of the advisor’s business, the loss of key personnel, and the transition of the advisor’s business in the event the owners are unable to continue providing advisory services due to death, disability or other reasons. The transition plan should include the following elements:

1. Policies and procedures developed to safeguard and either transfer or distribute client assets during transition.
2. Policies and procedures that facilitate the prompt generation of client-specific information necessary to transition each client account both internally to a new     investment advisor representative or externally to another advisor.
3. Information regarding the corporate governance structure and key personnel of the advisor.
4. The identification of any material financial resources of the advisor, such as custody and bank accounts.
5. An assessment of legal and contractual obligations implicated by the transition of the advisor and its clients, including pooled investment vehicles.

Special considerations for single-owner firms
Single-owner firms may be required to establish a different version of the transition plan called a “continuity agreement.” A continuity agreement is a legal contract that appoints an “alternate” registered investment advisor to assume client responsibilities in the event of the death or incapacity of the single-owner. If this were to occur the “alternate” advisor would be responsible for offering to assume the advisory role (the client has the ability, of course, to decline). The extent of the alternate advisor’s responsibilities can vary. They may be limited to interim oversight while the clients seek a new advisor. Another implementation of the continuity agreement could have the alternate advisor charged with overseeing the sale of the business or may detail how the alternate advisor will acquire the advisory business themselves.

What to Do?
Pinnacle Advisor Solutions invites you to participate in a webinar with Michael Kitces of Pinnacle Advisory Group and Chris Winn of AdvisorAssist to discuss the proposed rule, its implications and what steps an advisor can take to satisfy the proposed rule. Please also feel free to contact Brian Young at AdvisorAssist to learn more about the proposed rule or Tim Mascari at Pinnacle Advisor Solutions to learn more about its turnkey continuity and succession planning solutions that will satisfy the requirements of the proposed rule.

About the Author

AdvisorAssist

Michael D. Conlon, JD is Vice President Advisor Compliance / General Counsel and Brendan Furey is Senior Compliance Consultant & Associate Counsel for AdvisorAssist.

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