InvestmentNews Editorials

SEC should refrain from branding advisers as fraudsters over poor continuity planning

Though well intentioned, push to put spotlight on succession goes too far

Sep 18, 2016 @ 12:01 am

Kudos to the Securities and Exchange Commission for shining a spotlight on the importance of succession planning by financial advisory firms. But let's step back and take a deep breath before branding those firms that come up short of the SEC's requirements as fraudsters.

It would be difficult to overstate the importance of a solid and serious succession plan, a point that has been well-documented by InvestmentNews. And we continue to be proponents of keeping a robust focus on succession planning.

Internal continuity or succession plans at advisory firms are sometimes a low priority or may include outdated documents; the SEC deserves credit for pressing advisers to make continuity a higher priority. After all, we're talking about the life savings of millions of investors potentially being at risk should something suddenly disrupt the ownership or asset management capabilities at an advisory firm.

The SEC has a point, and as a regulator, legitimate concern over this area of importance.

But the agency, in its effort to try to wrestle back control of the advisory space from prudential regulators muscling in through the Financial Stability Oversight Council, which was created by the Dodd-Frank Act, may be overzealous in terms of disciplinary action.


Like many things, this issue has become politicized, which helps explain the somewhat strange bedfellows opposing the SEC's efforts to apply such heavy-handed punishment. Both industry lobbying groups and advisory groups have come out in support of the intent of the rule, but oppose the idea of making advisers liable for fraud if they lack an acceptable business continuity plan.

(Related read: Advisers have a fiduciary duty to put robust business continuity plans in place)

Opponents also take issue with the SEC's establishment of a new rule focusing on business continuity plans, when rules already on the books (specifically, Rule 206(4)-7 of the Investment Advisers Act) cite the “fiduciary obligation” to protect client interests in the event the adviser is unable to provide his or her services.

“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. “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.”

In fairness, the SEC has been transparent and vocal about its plans to increase oversight in this area.


In 2013, it issued a risk alert after reviewing the business continuity plans of 40 advisers in the wake of Hurricane Sandy, when many advisory firms in the Northeast had to temporarily shut down. And in late 2014, SEC Chairwoman Mary Jo White announced plans to develop a “recommendation to require investment advisers to create transition plans to prepare for a major disruption in their business.”

The commission's proposed rule was presented for public comment in June. The comment period ended Sept. 6, attracting 31 letters.

At this point, there is little time left for a lot of back-and-forth debate about the proposed rule, because it seems clear that Ms. White wants this issue off the table by year-end.

(Related read: SEC proposes rule to require business continuity plans for advisers)

The potential scar of a fraud label has gotten the industry's attention, and maybe that was the point. The industry is now trying to coax the SEC to just add new guidance to the existing compliance rules. But the agency seems intent on creating a new rule specifically to address the issue of business continuity plans.

Therein lies the politicized power struggle that is triggering fallout for advisory firms, which are rightfully quaking in their boots over the notion of a potential fraud violation.

Now that the SEC has gotten everyone's attention, it is time for calmer heads to prevail.

Keep the heat on continuity plans, but take fraud off the table. Replace it with something more appropriate by at least starting with a fine.


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