Regulators Alert Financial Firms to Disaster Risk

August 30, 2013

The Securities and Exchange Commission has issued a risk alert on business continuity and disaster recovery planning for investment advisers.

The SEC risk alert from its Office of Compliance Inspections and Examinations (OCIE) follows a joint advisory issued on August 16 by OCIE, the Commodity Futures Trading Commission’s Division of Swap Dealer and Intermediary Oversight, and the Financial Industry Regulatory Authority on business continuity and disaster recovery planning in the aftermath of Hurricane Sandy.

While the joint advisory covered a broad array of firms, the SEC memo focuses exclusively on investment advisers. Both documents are intended to encourage firms to review their business continuity plans so as to improve responses to and reduce recovery time after significant large-scale events.

The advisories were prompted by a review of responses to Hurricane Sandy, which caused widespread damage to Northeastern states and closed U.S. equity and options markets for two days in October 2012.

“Our staff examined approximately 40 advisers in the aftermath of Hurricane Sandy to assess their preparedness for and reaction to the storm,” said OCIE Director Andrew Bowden. “We hope our observations in this Risk Alert and those in the earlier joint advisory will help industry participants better prepare for future events that threaten to disrupt market operations.”

“With hurricane season underway, and with the problems from last year fresh in mind, we trust that our member firms will review their business continuity planning procedures against these best practices,” FINRA Executive Vice President Grace Vogel said.

The communication for the SEC says advisers should enhance their business continuity plans (BCPs) to anticipate possible interruptions in key business operations and loss of key personnel for extended periods.

The SEC says in its post-Sandy review it found that some advisers’ business continuity plans (BCPs) did not adequately address and anticipate widespread events. “These advisers generally experienced more interruptions in their key business operations and inconsistent communications with clients and employees. For example, some advisers did not have adequate plans addressing situations where key personnel, such as portfolio managers, were unable to work from home or other remote locations,” the SEC memo says.

According to insurer FM Global, its commercial and industrial clients who spent an average of $7,400 on recommended hurricane preparedness measures ahead of Hurricane Katrina prevented an average of $1.5 million in hurricane-related damages per location. Those who were ready for the storm reduced their losses by 85 percent compared to those who were not fully prepared, the insurer said.

FM Global said one Wall Street client, through inexpensive but strategic flood mitigation prior to Sandy, likely prevented a $10 million loss. Furthermore, FM Global said, the client’s downtime was only 12 days compared to 6 to 12 months had steps not been taken to reduce flood exposure.

The SEC risk alert makes observations in the following areas:

  • Preparation for widespread disruption
  • Planning for alternative locations
  • Preparedness of key vendors
  • Telecommunications services and technology
  • Communication plans
  • Reviewing and testing

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