Business Continuity and Transition Plans for Investment Advisors in Michigan

Business Continuity and Transition Plans for Investment Advisors in Michigan

Article by Dan McGlinn

Investment Advisors in Michigan should be aware that both Michigan and the federal government have proposed administrative rules that would require that Investment Advisors develop Business Continuity and Succession Plans. 

A Business Continuity Plan addresses the continuation of the Investment Advisor’s business when impacted by certain events (natural disasters, acts of terrorism, cyber-attacks, equipment failures, and loss of key service providers, facilities, or key personnel). A Transition Plan addresses the winding down/sale or merger of the Investment Advisor’s business, or even bankruptcy.

Proposed Federal Rule:

Proposed federal rule 206(4)-4 (June 28, 2016), under the Investment Advisers Act of 1940, would require an Investment Advisor to adopt and implement written business continuity and transition plans.  In addition, the rule would require that copies of such plans be retained for five years, and that an each annual review of the plan be documented.

The proposed federal rule and commentary is much more robust than the proposed Michigan rule (R451.4.21).  For example, the federal rule would require business and continuity procedures that address the following:

(i) maintenance of critical operations and systems, and the protection, backup, and recovery of data; (ii) pre-arranged alternate physical location(s) of the adviser’s office(s) and/or employees; (iii) communications with clients, employees, service providers, and regulators; (iv) identification and assessment of third-party services critical to the operation of the adviser; and (v) plan of transition that accounts for the possible winding down of the adviser’s business or the transition of the adviser’s business to others in the event the adviser is unable to continue providing advisory services.

The proposed federal rule anticipates that the plan detail will be less robust with smaller Investment Advisor businesses.

Proposed Michigan Rule:

The proposed Michigan Business Continuity and Succession Planning Rule would add R 451.4.21 to the Michigan Administrative Code. See Michigan Register, September 1, 2016 or access the Revision text here. The proposed rule would require that an Investment Advisor establish, implement, and maintain written procedures relating to a business continuity and succession plan.  Like the federal rule, the rule suggests that the plan would be scalable based upon the size of the Investment Advisor business.  At the very least, under the proposed Michigan rule, a Business Continuity and Transition Plan would address the following:

  (a) The protection, backup, and recovery of books and records.

  (b) Alternate means of communications with customers, key personnel, employees, vendors,  service providers, third-party custodians, and regulators, including, but not limited to, providing notice of a significant business interruption or the death or unavailability of key personnel or other disruptions or cessation of business activities.

  (c) Office relocation in the event of temporary or permanent loss of a principal place of business.

  (d) Assignment of duties to qualified responsible persons in the event of the death or unavailability of key personnel.

  (e) Otherwise minimizing service disruptions and client harm that could result from a sudden significant business interruption.

Although it remains to be seen whether either the federal or the Michigan rule will be adopted, these proposed rules appear to promote business planning that all Investment Advisors should be pursuing, in an effort to minimize potential risk of harm to clients and investors.

 

Contact Dan McGlinn

Posted on May 30, 2017
Tagged as Business Law