An SEC proposal to require advisors to create business transition plans would burden small practices and unfairly expose advisors to fraud charges, industry opponents of the rule said.
In public comments submitted to the SEC, the Investment Adviser Association (IAA) and the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA) warned against the implementation of rules the SEC says are designed to lessen the impact on clients of major upheavals at advisory firms.
“[With the proposed rules], an adviser could be found to have violated the fraud section of the Advisers Act without having committed any substantive violation that harmed or even impacted clients,” the IAA told the SEC. “Imperfections [in business continuity plans] may not reflect fraudulent or deceptive conduct, but rather decisions made in good faith that were rendered inadequate by unforeseen events.”
The rules also would place a financial burden on advisors, the organization of SEC-registered investment advisory firms said.
“An anti-fraud rule … could cause advisers to devote enormous resources in order to fend off a potential fraud claim for relatively minor risks or risks unrelated to their business,” the IAA said.
SIFMA, which represents securities firms, banks and asset management companies, warned the proposed business continuity regulations would significantly expand the scope of what constitutes fraudulent and deceptive activity by an advisor.
The trade association contended the SEC could level charges of deception or manipulation against advisors even for benign temporary outages of service.
Both groups pointed out SEC compliance guidelines already dictate advisors have business continuity plans.
However, IAA and the Investment Company Institute conceded more could be done to encourage advisors to improve them.
IAA argued advisors should be given greater flexibility than the proposed rules call for because many of the requirements would be too burdensome for small businesses.