U.S. SEC proposes rule on transition plans for investment advisers

[June 29, 2016]  By Lisa Lambert

WASHINGTON (Reuters) - The top U.S. securities regulator on Tuesday proposed a rule intended to ensure that investors are not harmed when asset managers fall on hard times or close up shop.

The proposed rule would require investment advisers to put in place business continuity and transition plans, laying out how they would minimize material disruptions to service in the event of business disruptions such as natural disasters, cyber-attacks, technology failures or the departure of key personnel.

“While an adviser may not always be able to prevent significant disruptions to its operations, advance planning and preparation can help mitigate the effects of such disruptions and in some cases, minimize the likelihood of their occurrence, which is an objective of this rule,” Securities and Exchange Commission Chair Mary Jo White said in a statement.

She added that the proposal is part of a broader effort to "modernize and enhance regulatory safeguards for the asset management industry."

Advisers could tailor their plans to fit their operations and risks specific to their particular business models. Specifically, they would need plans to maintain systems and protect data, arrange alternative work sites, keep up communications and review third-party service providers. They would also need to show how they would handle the transition of winding down or stopping services.

“This is an important part of Chair White’s rulemaking agenda for the asset management industry," said David Blass, general counsel for the Investment Company Institute, the leading trade association for registered funds.

ICI is currently reviewing the proposal.

Regulators are drawing stricter boundaries for the industry and the SEC has zoned in on asset management this year. It has proposed changing information funds must disclose, as well as measures on their liquidity management and use of derivatives. The commission has also scaled back on examining brokers to boost oversight of investment advisers.

U.S. Securities and Exchange Commission Chair Mary Jo White is interviewed at the Reuters Financial Regulation Summit in Washington, US May 17, 2016. REUTERS/Gary Cameron

Also on Tuesday, the commission announced it added a new co-chief to its enforcement division's asset management unit, Dabney O'Riordan, who has investigated "a wide variety of misconduct" across the industry. O'Riordan has worked on cases involving advisers who misallocated private fund expenses as well as investigations into "gatekeepers" such as auditors, according to the commission.

In April, the heads of the major U.S. financial regulatory agencies called for more analysis of hedge funds in its review of risks the asset management industry could pose to financial stability.

(Reporting by Lisa Lambert; Editing by Dan Grebler and Andrew Hay)

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