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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. 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.
Under the proposal, advisers would have to review their plans at least annually.
“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.”
Regulators are drawing stricter boundaries for the industry and the SEC has zoned in on asset management this year. It has proposed changing the information funds must disclose, as well as measures on the funds’ liquidity management and use of derivatives. The commission has also scaled back on examining brokers so its staff can boost oversight of investment advisers.
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 asset management 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 a deeper look at hedge funds in a special review of risks that the asset management industry poses to the country’s financial stability.
The Investment Company Institute, the leading trade association for regulated funds, did not immediately respond to a request for comment on the proposal.
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