Adviser Disaster Plans Don’t Hold Water

Securities Litigation and Enforcement   |   December 1, 2013
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In the wake of Hurricane Sandy, an SEC National Exam Program Risk Alert has identified gaps in some investment advisers’ disaster recovery and business continuity procedures (BCPs), including:

  • inadequate anticipation of truly widespread disasters in which, for example, key personnel are not even able to work from their homes and other planned remote locations, or back-up facilities are not safely located;
  • failure by advisers to critically evaluate the BCPs of their IT and other service providers (including SSAE 16 reports);
  • failure to arrange for maintenance that will assure that back-up computer servers will function properly;
  • insufficient testing of the adviser’s BCPs, including overly narrow test scenario assumptions or failure to apply the assumptions to all critical business operations and systems. In particular, the Risk Alert criticizes advisers who failed to test a critical system because the system’s vendor imposed a charge or other disincentive to testing; and
  • inadequate arrangements for communicating with employees and clients in the event of a crisis.

The Risk Alert, which is based on a National Exam Program review of the BCPs of 40 investment advisers, was motivated by Hurricane Sandy and contains numerous other observations and specific suggestions. According to the Exam Program staff, "Advisers should review their continuity plans in light of the staff’s observations and consider revising their plans if they see ways to make them better."

The points covered in the Risk Alert provide advisers a useful checklist for doing just that, and SEC examiners can be expected to refer to the alert, as well.

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