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SEC Proposes Rule Requiring Investments Advisors to Adopt Business Continuity Plans.

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  • Posted on: Jul 22 2016

What are the elements of a sound business succession plan?

In June, the Securities and Exchange Commission (“SEC”) proposed a rule that would require registered investment advisors to adopt formal business continuity and transition plans in the event of business disruptions whether from natural disasters, cyber attacks or the death of key people, particularly the firm’s owner. The succession plans should enable a firm to continue meeting its fiduciary obligations to clients by establishing risk management plans related to business continuity.

While many firms have already implemented continuity plans in the wake of catastrophic events like Super Storm Sandy, the proposed rule emphasizes transition planning, particularly for smaller firms in the event of a top advisor’s sudden death. In particular, investment advisors need to create “what if” scenarios that can allow for the seamless transition of client data and investments.

The Compliance Burden

Some observers believe the compliance costs related to the propose rule should be manageable, ranging from $30,000 to $70,000 depending on the size of the firm. The challenge, however, will be the administrative details in establishing systems that will allow for retention and transition of data, possibly involving off-site back-up locations.

In addition, an investment advisory firm should have an organizational chart in place so that an outsider can ascertain who the key players are, what they do, and who is next in line. If the proposed rule is adopted, the SEC estimates a firm will need to dedicate as much as 250 hours of staff time to establish a continuity plan.

The proposed rule was reportedly prompted by the SEC’s concern with protecting investors from a wide range of threats, including cyber attacks, information security issues, and natural disasters. Moreover, as investment advisors age, succession planning becomes critical. Lastly, industry observers note that SEC chairwoman Mary Jo White will soon be stepping aside, and addressing business continuity and transition planning has been on her checklist.

If and when the rule will be adopted remains unclear. That being said, it is essential for any business, not just investment advisory firms, to have a well designed business succession plan in place. An experienced business law attorney can help your firm design a continuity and transition plan.

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