The SEC's Division of Investment Management recently issued a Guidance Update on business continuity planning for registered investment companies (funds).1 The staff of the SEC states that "business continuity planning is critical to a fund complex's (or any business entity's) ability to continue operations during, and recover from, a significant business disruption"2 (emphasis added). The staff emphasizes that fund complexes should consider how to mitigate exposure through business continuity policies and procedures that address potential disruptions in services, whether provided internally at the fund complex or by a critical third-party service provider. The staff observed common practices among fund complexes with respect to business continuity plans (BCPs), including plan coverage, cross-functional employee participation, CCO participation, fund board presentations, annual testing, and ongoing monitoring.
With respect to outsourcing, the staff recommends that fund complexes "consider conducting thorough initial and ongoing due diligence of those third parties, including due diligence of their service providers' business continuity and disaster recovery plans."3 According to the staff, critical service providers would include each investment adviser, principal underwriter, transfer agent, custodian, and pricing agent. The staff recommends that a BCP should consider the following:
- Examining critical service providers' backup processes and redundancies;
- How best to monitor whether a critical service provider has experienced a significant disruption;
- How the BCPs of a fund's critical service providers interrelate; and
- Scenario planning for how a critical service provider disruption could impact fund operations and investors.
The SEC's guidance stresses the importance of the evaluation by fund complexes of the BCPs of its critical service providers. As the staff specifically notes, due diligence of such providers should be thorough and is to be performed at the initial engagement of such third parties, and ongoing during the course of the relationship. The staff acknowledges that fund policies, procedures, and plans should be tailored based on the nature and scope of the fund complexes' business, but, given recent events, the SEC clearly intends more focus on the BCPs of critical service providers to a fund complex.
For a complete copy of the IM Guidance Update, click here.
[1] IM Guidance Update, June 2016, No. 2016-04, issued by the Division of Investment Management of the U.S. Securities and Exchange Commission.
[2] Id. at p. 2.
[3] Id. at p. 3.