The Securities and Exchange Commission is alerting advisors that it’s part of their fiduciary responsibility to ensure they have proper business continuity and disaster recovery plans in place.
The SEC’s National Exam Program alert, released Wednesday by the Office of Compliance Inspections and Examinations, comes on the heels of a jointly released advisory by the SEC, Commodity Futures Trading Commission and Financial Industry Regulatory Authority telling firms about the steps they should take to implement effective business continuity and disaster recovery plans now that hurricane season is here.
The SEC cites Hurricane Sandy, which caused significant and wide-ranging damage across the Northeast on Oct. 28 and 29, leading to the closure of the equities and options markets on Oct. 29 and 30.
The storm prompted the SEC’s National Examination Program to review the business continuity and disaster recovery plans of approximately 40 advisors in the impacted areas.
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The SEC says that some advisors adopted business continuity plans that “did not adequately address and anticipate widespread events,” and that these advisors “generally experienced more interruptions in their key business operations and inconsistent communications with clients and employees. For example, some advisors did not have adequate plans addressing situations where key personnel, such as portfolio managers, were unable to work from home or other remote locations.”
Rule 206(4)-7 under the Investment Advisers Act of 1940 requires each advisor to adopt and implement written policies and procedures reasonably designed to prevent the advisor from violating the law, the SEC tells advisors in the alert.
The Risk Alert issued by the three regulators follows a joint advisory issued on Aug. 16 by OCIE, the CFTC’s Division of Swap Dealer and Intermediary Oversightand FINRA on business continuity and disaster recovery planning in the aftermath of Hurricane Sandy.
While the joint advisory covered a broad array of firms, the Risk Alert focuses exclusively on investment advisors.
Like the Risk Alert, the National Exam Program alert tells advisors to have policies in place to address the following areas:
- Preparation for widespread disruption
- Planning for alternative locations
- Preparedness of key vendors
- Telecommunications services and technology
- Communication plans
- Reviewing and testing
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