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SEC Proposes Rule Requiring Business Continuity and Transition Plans for Advisors

  • By  Scott D. Calhoun
  • |
  • September 27, 2016

This summer, the SEC issued a proposed rule that would require all registered investment advisors to adopt and maintain written business continuity and transition plans.  The purpose is to ensure that clients are protected in the event of major business disruptions, whether temporary or permanent from such events as natural disasters, cyber attacks, departure of key personnel, and similar causes.

 Discussion during business conference in agency

You may well be aware of this proposed rule. If not, you need to become aware. The most surprising thing to me is that the regulators are imposing a set of standards requiring common sense. Although the stated purpose is to protect the investing public – which the proposed rule will do – the effect is to force registered investment advisors to properly protect their business. This is nearly unheard of, coming from the regulators.

A couple of key points, from the legal perspective:
  • Currently, this is just a proposed rule. The original comment period has expired, but the rule could be changed or further comments could be requested. Keep your eyes on this.
  • When the final rule goes into effect, if it resembles the proposed rule closely, this will be mandatory. The proposed rule says that it will be unlawful for a registered investment advisor to provide investment advice to clients without a business continuity and transition plan in effect.

I strongly advise you to coordinate the required business continuity plan with any existing or planned business succession plans and related legal documents. 

As advisors, you may be provided templates or exemplars from your umbrella organization to use as a continuity plan, but you need to be very mindful of what your internal succession plan (including a corporate shareholder buy-sell agreement or an LLC operating agreement) provides. Inconsistencies could be disastrous in their own right.

How important is this ruling?

I have written before about the importance of succession planning.  The new proposed regulation ups the stakes significantly. 

This issue needs to be on your front burner, not lumped in with all the other “get to it some day” legal concerns.  Otherwise, lawyers like me will make a lot of money trying to sort it all out later.

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Author Bio

Scott serves as Ironstone’s legal counsel and has more than 25 years’ experience in corporate law. He has a broad base of experience in the formation and structuring of all types of business entities and non-profit organizations as well as in mergers and acquisitions. Scott advises clients on a full range of business matters, including business entity formation, securities offerings, trademark registration and related agreements, lease negotiations, stock or asset acquisitions, employment agreements, partnership agreements, franchise agreements and related issues, secured lending or other financial transactions, shareholder agreements, and LLC operating agreements. Mr. Calhoun also has significant experience with estate planning, wills and trust drafting, and estate administration. Mr. Calhoun has served as general corporate counsel for a large number of small and medium size businesses. As corporate counsel, he advises clients on the full range of business legal matters described above, and he also consults on general business issues faced by those clients. His counsel also includes planning and implementation advice concerning asset protection and business succession issues, which often entails proper use of trusts and other planning vehicles. In the broader area of estate planning, Scott has significant experience with estate tax matters, drafting of wills, life insurance trusts, and other estate planning documents, and estate administration.