Industry, adviser groups raise concerns about SEC's business continuity proposal

They caution that making advisers liable for fraud if they lack such a plan is the wrong way to achieve investor protection goals

Sep 8, 2016 @ 11:51 am

By Mark Schoeff Jr.

Industry and adviser groups agree with the intent of a Securities and Exchange Commission proposal to require more rigor from financial advisers in planning for unexpected disruptions to their business. But in comment letters to the agency, they cautioned that making advisers liable for fraud if they lack such a plan is the wrong way to achieve investor protection goals.

In June, the SEC proposed a rule that would mandate advisers to adopt and implement written continuity plans that would go into effect in the case of a natural disaster, cyberattack or death of a key firm leader, among other situations.

But industry and adviser organizations would rather have the SEC issue guidance on business continuity under existing compliance rules than create another regulation.

“We believe the adoption of a new antifraud rule, as proposed, is unnecessary and in fact could become counterproductive,” Robert Grohowski, general counsel at the Investment Adviser Association, wrote in a Sept. 6 comment letter.

He added: “New guidance under the Compliance Program Rule would be preferable, both because it would be inherently more flexible than a new rule and because it would allow the commission to more appropriately characterize deficiencies in business continuity and transition planning as a breakdown of the firm's compliance program rather than as fraud.”

The proposed rule is part of a package of SEC regulations designed to address potential systemic risk in the asset management industry.

Even if the SEC sticks to its guns on a new transition rule, it should be careful in the kind of liability it attaches to it, the Securities Industry and Financial Markets Association said.

“Should the SEC determine that a new rule is necessary, we also strongly urge the SEC to avoid imposing 'fraudulent' liability for business continuity practices and establishing a new, unprecedented level of accountability for functions carried out by third-party service providers,” Timothy Cameron, SIFMA asset management group head, wrote in a Sept. 2 comment letter.

When the term “fraud” comes into the conversation, industry participants get nervous.

“In an environment where enforcement is a priority for the SEC, any new antifraud rule is going to cause concern that the SEC is going to have another means for bringing an enforcement action,” said Amy Doberman, a partner at WilmerHale.

Another aspect of the rule causing jitters is that it applies to situations that are inherently unpredictable.

“Advisers can't control the unknown,” Ms. Doberman said. “The concern is that it's going to be an impossible standard to meet.”

The rule is among a suite of regulations the SEC is trying to finalize by the end of the year.


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