SEC Proposed Rule 206(4)-4 & Proposed Amendments to Rule 204-2 Business Continuity & Transition Plans

Posted by Marcus Hagood on Oct 18, 2016 3:37:25 PM

In past years, the slow and steady migration of independent financial service providers to the independent Registered Investment Advisory (RIA) channel has been well documented. As the number of state and SEC registered advisors continues to swell, the regulatory framework under which they have operated will undoubtedly become increasingly complicated.

For years, it has been the practice of regulators to primarily focus their attention on the largest players in our industry. Broker Dealers, Custodians, and product producers have, by and large, borne the responsibility of complying with our industry rules, if not in actual operation, then through procedural and compliance oversight of the independent producer. Call it the cost of success, but the regulatory bulls-eye is–without question–moving more and more toward the independent financial service provider. A perfect example of this is the SEC proposed Rule 206(4)-4 and amendments to Rule 204-2 for “Business Continuity and Transition Plans.”


After finding that many RIA firms were not well prepared in the aftermath of Hurricanes Katrina and Sandy, the SEC released alerts that practice owners should more closely review their disaster preparedness and continuity plans. Many of the new requirements under the proposed rules were to address shortfalls that were identified by these events in actual practice. Unfortunately, that guidance appears to be ignored by many whether through frustration, inability, or otherwise. Add to this, as FP Transitions has often pointed out, the substantial lack of Continuity Planning (death or disability planning) in our aging industry, and you have a perfect storm for regulatory intervention.

The Proposed SEC Rule 206(4)-4 and the amendments to Rule 204-2 are stepping in to address these apparent short falls in preparedness. Although many of these new regulations are considered within requirements that have long been in place for Business Continuity and Disaster Recovery under SEC Rule 38-1a and FINRA rule 4370, there are significant new requirements that are part of the language in the proposed rules and rule changes. Some of the highlights include:

  • A formal plan will now be a “Fiduciary” requirement under the law to operate as an SEC Registered Investment Advisor
  • It will be considered “Fraudulent and Deceptive” if the proscribed protections are not in place
  • A new requirement to ensure “Transition” in the event of key employees death or disability
  • Annual review and updating of the plan is required
  • A new 5-year retention requirement for plans and changes (Electronic is allowed)


The overall focus of the new rule is to prevent disruption to the client and ensure that the client has access to advisory services at all times. Although the intention is admirable, it will require considerable adjustment to most advisor's plans. Key items to consider while developing your plan to meet the new regulation include (but are not limited to):

  • Alternate business locations – identified and tested to ensure comparable service access
  • Data recovery – hard copy and electronic
  • Critical systems recovery/failover
  • Third-party providers and their plans
  • Temporary and permanent loss of key personnel
  • Inventory of key documents, personnel, service providers, contacts, regulatory agencies and critical systems
  • Communication plan for clients, employees, and regulatory agencies
  • Risk of Cyber Attacks
  • Practice liquidation in the event of death or disability with no impact on client access to assets, information, and services
  • Liquidation in both normal and stressed market conditions
  • Assets that may need special instruction or direction for handling
  • Procedures and policies for the prompt generation of client data needed to transition the accounts and assets should be included
  • Organizational charts for management structure, roles and responsibilities of important decision makers– including identity and emergency contact information
  • Contractual obligations that may impact the transition

The SEC does acknowledge that this is not a “one size fits all” approach or solution, and that certainly size and complexity of the organizational and service structure will dictate the complexity of each individual plan.

It also appears that the SEC is taking a principles-based approach that allows for each firm to consider its individual risk circumstances and address them with their individual plan. The flexibility is fantastic, but leaves much to the interpretation of the individual practice holder, and could create serious legal and fiduciary issues once the audit process begins post rule implementation.


FP Transitions, has provided guidance on Continuity Planning (death and disability) for our clients for the past 18 years. Our guidance has not changed in light of these regulations, and our white paper, Continuity Planning, provides guidance on how best the independent financial advisor can address the “Transition” component of this new regulation.

For those firms that require assistance in finding a viable partner to meet their “Transition” requirement under these potential new rules, FP Transitions offers a Continuity Partner Matching service that can match you with other advisory firms to help you meet your Fiduciary obligations. FP Transitions continues to provide value added services through our Equity Management System to assist you in the preparation of your “Business Continuity and Transition” plan and help you address all the potential risks that are part of this important process.

The comment period for the proposed rule closed on September 6, 2016 with minimal comment for such a weighty subject. Possibly, part of the reason for this is the recent Department of Labor ruling and the enormous effort around complying with that new regulation.


The shifting focus to individual advisory firms is due, in part, to the success of the independent Registered Investment Advisory model, and, in part, due to the industry’s failure to address fundamental issues like succession in an aging industry. Past reliance on your Custodian, Broker Dealer, or other industry players to provide cover from your Fiduciary responsibilities is no longer a viable option. It’s up to you now.


Download : Continuity Planning White Paper


Topics: Continuity Planning, Transition Plan, SEC, Securities & Exchange Commission

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