The SEC and state regulatory bodies have been tightening up their audit practices in many areas of compliance. The frequency and severity of recent natural disasters has brought sharp regulatory focus on the quality and effectiveness of the business continuity and disaster recovery plans (BC/DR plans) used by investment advisors. As a result, I asked my colleague, Steve Galletto, to share his thoughts on the changing regulatory landscape regarding BC/DR plans.
Galletto advised that in some instances, advisors located within a geographic area affected by a natural disaster have been subject to regulatory probes geared toward determining whether the BC/DR plans maintained by those firms were sufficient to protect advisory clients from the risk of a business interruption.
Business interruptions pose a threat to advisors and their ability to service clients. When faced with a business interruption, firms that have invested time and effort in BC/DR planning find themselves in a better position to resume operations than those firms that failed to do so. Well-drafted and maintained BC/DR plans help investment advisors prepare for disruptive events and may even prevent business interruptions from occurring. Unfortunately, BC/DR plans have become an afterthought for some investment advisors.
As a fiduciary, an investment advisor is obligated to take steps to prevent business interruptions that could potentially put clients at a disadvantage. Accordingly, SEC Rule 206(4)-7 and comparable state regulations require that investment advisors maintain a BC/DR plan. However, these regulations fail to provide advisors with specific guidance as to the development of an effective plan.
