Articles Tagged with Investment Advisers

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Today, the Securities and Exchange Commission published its 2014 priorities for its National Examination Program (“NEP”).  These priorities cover a wide range of issues at financial institutions, including investment advisers and investment companies, broker-dealers, clearing agencies, exchanges and other self-regulatory organizations, hedge funds, private equity funds, and transfer agents.  Similar to the 2013 priorities, the 2014 priorities were published to focus on areas that are perceived by the SEC staff to have heightened risk.

The examination priorities address market-wide issues and those specific to each of the NEP’s four program areas — (i) investment advisers and investment companies(“IA-IC”), (ii) broker-dealers (“B-D”), (iii) exchanges and self-regulatory organizations (“SROs”, and collectively, “market oversight”), and (iv) clearing and transfer agents (“CA” and “TA”).  For investment advisers and investment companies, the SEC has specifically outlined its priorities as follows: 

  • Core Risks
    • Safety of Assets and Custody
    • Conflicts of Interest Inherent in Certain Investment Adviser Business Models
    • Marketing Performance 
  • New and Emerging Issues and Initiatives
    • Never-Before Examined Advisers
    • Wrap Fee Programs
    • Quantitative Trading Models
    • Presence Exams
    • Payments for Distribution in Guise
    • Fixed Income Investment Companies 
  • Policy Topics
    • Money Market Funds
    • “Alternative” Investment Companies
    • Securities Lending Arrangements

The market-wide priorities include fraud detection and prevention, corporate governance and enterprise risk management, technology controls, issues posed by the convergence of broker-dealer and investment adviser businesses and by new rules and regulations, and retirement investments and rollovers. 

The full SEC press release can be found HERE and a full text of the 2014 Examination Priorities can be found HERE. 

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As the new year is upon us, there are some important annual compliance obligations Investment Advisers either registered with the Securities and Exchange Commission (the “SEC”) or with a particular state (“Investment Adviser”) and Commodity Pool Operators (“CPOs”) or Commodity Trading Advisors (“CTAs”) registered with the Commodity Futures Trading Commission (the “CFTC”) should be aware of.

See upcoming deadlines below and in red throughout this document.

The following is a summary of the primary annual or periodic compliance-related obligations that may apply to Investment Advisers, CPOs and CTAs.  The summary is not intended to be a comprehensive review of an Investment Adviser’s securities, tax, partnership, corporate or other annual requirements, nor an exhaustive list of all of the obligations of an Investment Adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) or applicable state law.  Although many of the obligations set forth below apply only to SEC-registered Investment Advisers, state-registered Investment Advisers may be subject to similar and/or additional obligations depending on the state in which they are registered.  State-registered Investment Advisers should contact us for additional information regarding their specific obligations under state law.

List of annual compliance deadlines in chronological order:

 

State registered advisers pay IARD fee November-December (of 2013)
Form 13F (for 12/31/13 quarter-end) February 14, 2014
Form 13H annual filing February 14, 2014
Schedule 13G annual amendment February 14, 2014
Registered CTA Form PR (for December 31, 2012 year-end) February 14, 2014
TIC Form SLT Every 23rdcalendar day of the month following the report as-of date
TIC Form SHCA March 3, 2014
Affirm CPO exemption March 3, 2014
Registered Large CPO Form CPO-PQR December 31 quarter-end report March 3, 2014
Registered CPOs filing Form PF in lieu of Form CPO-PQR December 31 quarter-end report March 31, 2014
Registered Mid-Size and Small CPO Form CPO-PQR year-end report March 31, 2014
SEC registered advisers and ERAs pay IARD fee Before submission of Form ADV annual amendment by March 31, 2014
Annual ADV update March 31, 2014
Delivery of Brochure April 30, 2014
Form PF filers pay IARD fee Before submission of Form PF
Form PF (for advisers required to file within 120 days after December 31, 2013 fiscal year-end) April 30, 2014
FBAR Form TD F 90-22.1 (for persons meeting the filing threshold in 2013) June 30, 2014
FATCA registration Must be completed by April 25, 2014
Form D annual amendment One year anniversary from last amendment filingIf the fund will be using 506(c) to generally solicit, the Form D must be amended to check the box that indicates the offering will be made under 506(c) 

 

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This guest post from Blake, Cassels & Graydon LLP, co-authored by Ross McKee, Partner, Blake, Cassels & Graydon LLP, is reprinted here with permission. 

INTRODUCTION

The Canadian Securities Administrators have proposed a new uniform Canadian registration exemption for investment sub-advisers, as part of a package of proposed amendments to Canadian registration rules. The proposed exemption will add a chaperone requirement that does not exist under the current sub-adviser exemptions in Ontario and Quebec. In addition, no adviser registration exemptions (such as sub-adviser or international adviser) could be relied upon by anyone registered as an adviser in any jurisdiction of Canada.

When registration reforms were introduced in 2009, one of the missing elements was a uniform national sub-adviser registration exemption for foreign advisers to a registered Canadian portfolio manager. This can arise when a Canadian portfolio manager seeks specialized investment expertise from a foreign adviser.

Ontario has long had an automatic exemption for sub-advisers under section 7.3 of OSC Rule 35-502 Non-Resident Advisers. Quebec has the similar exemption under Decision No. 2009 PDG-0191. In 2009, other provinces stated they were prepared to grant similar sub-adviser exemptions but only upon application. 

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Written by: Jay B. Gould

On December 12, 2013, the Securities and Exchange Commission (SEC) charged a London-based hedge fund adviser and its former U.S.-based holding company with internal controls failures that led to the overvaluation of a fund’s assets and inflated fee revenue for the firms.  The investigation came out of the SEC’s Aberrational Performance Inquiry, pursuant to which the Enforcement Division’s Asset Management Unit identifies suspicious performance through risk analytics.  The SEC searches for performance that is inconsistent with a fund’s investment strategy or other benchmarks and then conducts follow up inquiries.  In this case, the SEC worked with the United Kingdom’s financial regulator, the Financial Conduct Authority.

According to the SEC’s order instituting settled administrative proceedings, the GLG firms managed the GLG Emerging Markets Special Assets 1 Fund.  From November 2008 to November 2010, GLG’s internal control failures caused the overvaluation of the fund’s 25 percent private equity stake in an emerging market coal mining company.  The overvaluation resulted in inflated fees to the GLG firms and the overstatement of assets under management in the holding company’s filings with the SEC. 

The SEC order also stated that GLG’s asset valuation policies required the valuation of the coal company’s position to be determined monthly by an independent pricing committee.  On a number of occasions, GLG employees received information calling into question the $425 million valuation for the coal company position.  The SEC found that there were inadequate policies and procedures to ensure that such relevant information was provided to the independent pricing committee in a timely manner or even at all.  There also appeared to be confusion among GLG’s fund managers, middle-office accounting personnel, and senior management about who was responsible for elevating valuation issues to the independent pricing committee.  

The SEC’s order found that GLG Partners L.P. violated and GLG Partners Inc. caused numerous violations of the Federal securities laws.  It also required the GLG firms to hire an independent consultant to recommend new policies and procedures for the valuation of assets and test the effectiveness of the policies and procedures after adoption.  The GLG firms agreed to pay disgorgement of $7,766,667, prejudgment interest of $437,679, and penalties totaling $750,000.

The SEC has been targeting valuation cases recently as evidenced by the recent enforcement action against the Morgan Keegan fund directors and in the Ambassador Capital case.  Fund managers should review their valuation policies and procedures to make sure that such policies and procedures address current regulatory concerns, and to make sure that the disclosures in their fund documents are consistent with actual practice.

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Written by:  Jay B. Gould and Jessica M. Brown

On October 28, 2013, the Securities and Exchange Commission (“SEC”)  brought enforcement actions and imposed sanctions on three different registered advisers and their principals for violations of Rule 206(4)-2 under the Investment Advisers Act of 1940 (the “Custody Rule”).  The circumstances that gave rise to each adviser being deemed to have custody differed, however, certain violations of the Custody Rule were present in each case.  These advisers were sanctioned for (i) incorrectly reporting their custody of client assets on their Form ADV, (ii) not conducting a surprise audit by an independent public accountant to verify client assets in custody, (iii) not having a reasonable belief that a qualified custodian was delivering account statements to fund investors at least every quarter, and (iv) a lack of properly written policies and procedures to protect client assets in custody.

This interest by SEC examination and enforcement staff should come as no surprise to investment advisers.  Each year, the SEC publishes a list of areas on which examiners will focus their efforts during the year.  The 2013 examination priority publication listed the Custody Rule as the first item on the priority list.  The SEC clearly stated to the industry that examinations of investment advisers would scrutinize the adviser’s (i) understanding of what constitutes custody, (ii) compliance with the “surprise exam” requirement of the Custody Rule, (iii) satisfaction of the “qualified custodian” provision and, (iv) if applicable, proper use of the exception for pooled investment vehicles.

Generally, any adviser that has access to a client’s account or assets, or has an arrangement in place that permits it to withdraw client assets, must comply with the Custody Rule.  An exception to the annual surprise audit and account statement delivery requirements are available for advisers that have custody of private fund or hedge fund assets, as long as certain conditions are met.

Because the definition of custody is both broad and somewhat convoluted, advisers should regularly review how client assets are maintained to determine if they have custody of client assets within the meaning of the Custody Rule and, if so, whether their compliance procedures, regulatory disclosures and marketing materials accurately reflect current business practice.  Investment advisers should always stay familiar with what the SEC has determined will be examination and enforcement priorities.

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This is a reminder that the 2014 IARD account renewal obligation for investment advisers starts this November.  An investment adviser must ensure that its IARD account is adequately funded to cover payment of all applicable registration renewal fees and notice filing fees.

Key Dates in the Renewal Process:

November 11, 2013 – Preliminary Renewal Statements which list advisers’ renewal fee amount are available for printing through the IARD system.

December 13, 2013 – Deadline for full payment of Preliminary Renewal Statements.  By December 10, 2013, an investment adviser should have submitted to FINRA through the IARD system, its preliminary renewal fee in order for the payment to be posted to its IARD Renewal account by the December 13 deadline.

January 2, 2014 – Final Renewal Statements are available for printing.  Any additional fees that were not included in the Preliminary Renewal Statements will show in the Final Renewal Statements.

January 10, 2014 – Deadline for full payment of Final Renewal Statements.

For more information about the 2014 IARD Account Renewal Program including information on IARD’s Renewal Payment Options and Addresses, please visit http://www.iard.com/renewals.asp

 

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Written by: Jay B. Gould

On October 23, 2013, the Securities and Exchange Commission (“SEC”) voted unanimously to propose rules under the JOBS Act to permit companies to offer and sell securities through crowdfunding.

Crowdfunding describes an evolving method of raising capital that has been used outside of the securities arena to raise funds through the Internet for a variety of projects, products or artistic endeavors. Crowdfunding has generally not been used as a means to offer and sell securities because offering a share of the financial returns or profits from business activities would likely trigger the registration provisions of the federal securities laws relating to the offer or sale of securities.

Title III of the JOBS Act created an exemption under the securities laws so that this type of funding method can also be used to offer and sell securities without registration. The JOBS Act established the framework for a regulatory structure for this funding method. It also created a new entity – a funding portal – to allow Internet-based platforms or intermediaries to facilitate the offer and sale of securities without having to register with the SEC as brokers. Crowdfunding should not be confused with rules that were recently adopted under Regulation D that permits issuers of securities of private companies to engage in general solicitation or public advertising related to the sales of such securities.

The intent of the JOBS Act was to make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors. Critics, led by consumer groups and state securities administrators, have been critical of both the Regulation D amendments regarding general solicitation, as well as the crowdfunding provisions, as opening the floodgates for fraudster to prey on the financially unsophisticated. Accordingly, the challenge for the SEC is to establish a regulatory structure that both permits small companies and entrepreneurs to access investors in an efficient manner, while protecting the investors from scam artists.

Proposed Rules
The proposed rules would among other things permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions.

Under the proposed rules:

  • A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
  • Investors, over the course of a 12-month period, would be permitted to invest up to:

$2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.

10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.

Certain companies would not be eligible to use the crowdfunding exemption. Ineligible companies include non-U.S. companies, companies that already are SEC reporting companies, certain investment companies (such as hedge funds), companies that are disqualified under the proposed disqualification rules, companies that have failed to comply with the annual reporting requirements in the proposed rules, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.

Securities purchased in a crowdfunding transaction cannot be resold for a 12-month period. Holders of these securities would not count toward the threshold that requires a company to register with the SEC under Section 12(g) of the Securities Exchange Act of 1934.

Disclosure by Companies
The proposed rules would require companies conducting a crowdfunding offering to file certain information with the SEC, provide it to investors and the relevant intermediary facilitating the crowdfunding offering, and make it available to potential investors.

In its offering documents, among the things the company would be required to disclose are:

  • Information about officers and directors as well as owners of 20 percent or more of the company.
  • A description of the company’s business and the use of proceeds from the offering.
  • The price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount.
  • Certain related-party transactions.
  • A description of the financial condition of the company.
  • Financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.

Companies would be required to amend the offering document to reflect material changes and provide updates on the company’s progress toward reaching the target offering amount.

Companies relying on the crowdfunding exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.

Crowdfunding Platforms
Title III of the JOBS Act requires that crowdfunding transactions take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. Under the proposed rules, the offerings would be conducted exclusively online through a platform operated by a registered broker or a funding portal, which is a new type of SEC registrant.

The proposed rules would require these intermediaries to:

  • Provide investors with educational materials.
  • Take measures to reduce the risk of fraud.
  • Make available information about the issuer and the offering.
  • Provide communication channels to permit discussions about offerings on the platform.
  • Facilitate the offer and sale of crowdfunded securities.

The proposed rules would prohibit funding portals from:

  • Offering investment advice or making recommendations.
  • Soliciting purchases, sales or offers to buy securities offered or displayed on its website.
  • Imposing certain restrictions on compensating people for solicitations.
  • Holding, possessing, or handling investor funds or securities.

The proposed rules would provide a safe harbor under which funding portals can engage in certain activities consistent with these restrictions.

What’s Next?
The SEC will take public comments on the proposed rules for 90 days, after which it will review the comments and determine whether to adopt the proposed rules. Depending upon the tone and substance of the comments, the SEC may move quickly to adopt the rules as proposed, adopt the rules with certain modifications based on the comments, or re-propose the rule for additional public comment. Anxious market participants should not expect to start offering their crowdfunding securities.

Follow @Investment_Law on Twitter.

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Written by:  Jay B. Gould

On October 23, 2013, the Securities and Exchange Commission (“SEC”) brought charges against three different investment advisory firms for recidivist behavior.  The enforcement actions came out of the SEC’s Compliance Program Initiative, which targets firms that have been previously warned by SEC examiners about compliance deficiencies, but failed to effectively act upon those warnings.  The enforcement actions came out of the SEC’s Compliance Program Initiative, which targets firms that have been previously warned by SEC examiners about compliance deficiencies but failed to effectively act upon those warnings.  The SEC takes the view that investment advisory firms that ignore findings in deficiency letters, or represent that corrective action will or has been taken, and then do not take such corrective action, should be provided special treatment.  The SEC Enforcement Division’s Asset Management Unit has coordinated with examiners to bring several cases since the initiative began two years ago. 

The firms charged, Modern Portfolio Management Inc., Equitas Capital Advisers LLC, and Equitas Partners LLC, agreed to settlements in which they will pay financial penalties and hire compliance consultants.  Since the adoption of Rule 206(4)-7 under the Investment Advisers Act (“Compliance Rule”), requiring an investment adviser to hire an outside compliance consultant has been a preferred remedy imposed by the SEC.  .

The SEC’s order against Modern Portfolio Management (“MPM”) and its owners found that they failed to correct ongoing compliance violations, such as failing to complete annual compliance reviews in 2006 and 2009, and making misleading statements on their website and investor brochure.  According to the SEC findings, one location on MPM’s website represented that the firm had more than $600 million in assets.  However, on its Form ADV filing to the SEC during that same time period, MPM reported that the firm’s assets under management were $359 million or less.  Asset inflation, as well as education and professional experience “enhancement” are two favorites among Advisers Act violators, and fairly easy to verify by SEC examiners. 

MPM and their owners agreed to be censured and pay a total of $175,000 in penalties.  The two principals of MPM were required to complete 30 hours of compliance training, a remedy seemingly very close to violating the 8th Amendment.  MPM also agreed to designate someone other than the two principals to be its chief compliance officer, and is also required to retain a compliance consultant for three years.

According to the SEC’s orders against New Orleans-based Equitas Capital Advisers and Equitas Partners as well as their owner, current chief compliance officer, and former owner and chief compliance officer, they failed to adopt and implement written compliance policies and procedures and conduct annual compliance reviews to satisfy the Compliance Rule.  The SEC charged the Equitas firms with making false and misleading disclosures about historical performance, compensation, and conflicts of interest, and repeatedly overbilled and underbilled their clients.  Many of these violations occurred despite warnings by SEC examiners during examinations of the Equitas firms in 2005, 2008, and 2011.  Equitas and the named individuals failed to disclose these deficiencies to potential clients in response to questions in certain due diligence questionnaires or requests for proposals.  

The former owner of Equitas, who later went on to form Crescent Capital Consulting, an investment advisory firm, was also found to have been responsible for Compliance Rule violations at his new firm (as well as at Equitas) by inflating the amounts of assets under management of both firms their respective Forms ADV by improperly removing and retaining nonpublic personal client information when he left Equitas.

Equitas Capital Advisers and Crescent reimbursed all overcharged clients, and agreed to pay a total of $225,000 in additional penalties, but presumable did not go back after the clients that they undercharged. The Equitas firms agreed to censures, and both the Equitas firms and Crescent were required to hire an independent compliance consultant.  Perhaps the most damaging sanction was that the Equitas firms and Crescent are required to provide notice to clients regarding the SEC enforcement actions. 

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Written by:  Kimberly V. Mann

The Security and Exchange Commission’s recent enforcement action against Lawrence D. Polizzotto serves as a reminder to all issuers that Regulation FD enforcement is alive and well.

The Polizzotto Case

Polizzotto, the former vice president of investor relations at First Solar, Inc. (and, ironically, a member of the company’s Disclosure Committee, which is responsible for ensuring the company’s compliance with Regulation FD), was found by the SEC to have violated Section 13(a) of the Exchange Act of 1934 (the “Exchange Act”) and Regulation FD by selectively disclosing material nonpublic information to certain analysts and investors before the information was publicly disclosed.  The selective disclosures were made to reassure certain analysts and investors about the company’s prospects of obtaining two loan guarantees and to correct information that was previously disclosed about another loan guarantee. Polizzotto knew that First Solar had not yet issued a press release containing information about the status of the guarantees, but went forward with the selective disclosures in any event to counter adverse research reports about the company and stem substantial declines in the company’s stock price. The SEC also determined that Polizzotto directed a subordinate to make similar selective disclosures in advance of the public announcement. First Solar did not publicly disclose the information about the guarantees until the morning after the selective disclosures were made and the company’s stock price declined by 6% on the news.

Polizzotto’s selective disclosure caused First Solar to violate Section 13(a) and Regulation FD. Because First Solar provided what the SEC described as “extraordinary cooperation,” and because the company demonstrated a culture of compliance, it was not charged with any violations. The SEC’s order can be found at www.sec.gov/litigation/admin/2013/34-70337.pdf.

Regulation FD Basics

  • Under Regulation FD, an issuer or any person acting on its behalf that intentionally discloses material nonpublic information to (i) broker-dealers or their associated persons, (ii) investment advisers or their associated persons,
    (iii) investment companies or entities such as hedge funds that would be investment companies but for their reliance on exceptions available under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 or their affiliated persons or (iv) any of the holders of the issuer’s securities, where it is foreseeable that the recipient of the information would purchase or sell the issuer’s securities on the basis of the information disclosed is required to make simultaneous public disclosure of the information. Disclosure is intentional if the disclosing person knows or is reckless in not knowing that the information being disclosed is material and nonpublic.
  • If selective disclosure is unintentional, public disclosure is required to be made promptly following the selective disclosure. Public disclosure is made promptly by a fund if it is made as soon as reasonably practicable after a senior official of the fund or of the fund’s investment adviser learns that there has been unintentional disclosure of material nonpublic information. In no event will public disclosure be deemed promptly made if it is made after the later of (i) 24 hours after the senior official learns of the unintentional disclosure and
    (ii) commencement of trading on the New York Stock Exchange on the trading day after the senior official learns of the unintentional disclosure.
  • In the context of an investment fund, the term “issuer” means a closed-end fund that (i) has a class of securities registered under Section 12 of the Exchange Act (for example, a fund that has more than $10 million in assets and at least 2000 record holders of any class of its equity securities, or has at least 500 record holders of such securities that are not accredited investors) or (ii) is required to file reports under Section 15(d) of the Exchange Act. Open-end and other types of investment companies are not issuers for purposes of Regulation FD. Foreign private issuers also are not subject to Regulation FD.
  • A “person acting on behalf of a closed-end fund” would include a senior official of the fund or of the fund’s investment adviser or any other officer, employee or agent of the fund that regularly communicates with any person to whom selective disclosure of material nonpublic information is prohibited. An agent of a closed-end fund would include a director, officer or employee of the fund’s adviser or another service provider that is acting as an agent of the fund.
  • The requirements of Regulation FD do not apply to disclosures made by a fund  (i) to its attorneys or any other person that owes a duty of trust or confidence to the fund, (ii) to any person that is subject to an obligation to keep the disclosed information confidential, or (iii) in connection with most primary registered offerings of securities under the Securities Act of 1933. The requirements of Regulation FD apply to disclosures made in connection with unregistered private offerings; however, information may be disclosed privately to select recipients if the recipients are bound by a confidentiality agreement.
  • Public disclosure may be made by way of public filings under the Exchange Act, such as on Form 8-K, or by using any other method reasonably designed to provide broad, nonexclusionary public distribution (such as press releases through wire services with wide circulation, news conferences that are open to the public or publication on the issuer’s website).  In 2008, the SEC issued guidance on public disclosure through company websites, which can be found at   http://www.sec.gov/rules/interp/2008/34-58288.pdf.
  • On April 2, 2013, the SEC issued guidance indicating that social media outlets are permitted to be used to disseminate material information publicly in compliance with Regulation FD. The principles outlined in the 2008 guidance on company websites should be used to determine whether a particular social media outlet is an appropriate channel of distribution for purposes of Regulation FD. In order to use a company website or social media to disclose information publicly, investors must be notified of the specific website or social media channel to be used to provide information to the public. The SEC’s investigative report on social media and Regulation FD can be found at http://www.sec.gov/litigation/investreport/34-69279.pdf.

Regulation FD Compliance Measures 

The following is a partial list of measures that funds and their advisers might implement to assist with Regulation FD compliance.

  • Review existing Regulation FD policies with counsel and update them from time to time as appropriate. Indicate in the Regulation FD compliance policy the names and titles of those persons that are authorized to speak to investors on behalf of the fund.
    • Establish procedures for responding to inquiries from investors and market professionals.
    • Develop a definition of “material information” and incorporate it in the Regulation FD policy.
    • Establish procedures for handling one-on-one discussions with investors and market professionals.
    • Develop policies and procedures for the use of a website or social media to disseminate information to the public.
    • Maintain records of prior disclosures of material information.
  • Conduct periodic Regulation FD training for persons acting on behalf of the fund.
  • Conduct periodic Regulation FD compliance audits.
  • Establish accountability for Regulation FD compliance at top management levels.

Establishing effective policies and procedures designed to ensure compliance with Section 13(a) and Regulation FD may, in addition to reducing the risk of violations, have the effect of reducing the risk of liability in the event a violation occurs.

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Written by:  Jay B. Gould and Jessica Brown

In response to the devastating effect of Hurricane Sandy which temporarily crippled U.S. equity and options markets in October 2012, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert on business continuity and disaster recovery planning for investment advisers. In the aftermath of Hurricane Sandy, the SEC reviewed the business continuity and disaster recovery plans of approximately 40 advisers who were affected by the storm “to assess their preparedness for and reaction to the storm.”

On August 16, 2013, a joint advisory was issued by OCIE, the CFTC’s Division of Swap Dealer and Intermediary Oversight, and the Financial Industry Regulatory Authority on business continuity and disaster recovery planning for a wide array of firms. The Risk Alert focuses exclusively on investment advisers and encourages advisers to review their business continuity plans in light of OCIE’s findings.  

The Risk Alert highlights the notable practices and weakness identified in the business continuity and disaster recovery plans and suggests improvements advisers could make to their plans in the following areas:

  • Preparation for widespread disruption
  • Planning for alternative locations
  • Preparedness of key vendors
  • Telecommunications services and technology
  • Communication plans
  • Reviewing and testing