Recently, the Securities and Exchange Commission (“SEC”) and other U.S. financial regulators (collectively, “Regulators”) issued important guidance related to the need for industry participants to maintain business continuity and disaster recovery plans (“BCPs”). First, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published a National Exam Risk Alert (“Risk Alert”) prepared by the staff and directed to U.S.-registered advisers. Hurricane Sandy prompted the SEC’s National Exam Program (“NEP”) to review the BCPs of about 40 advisers. The NEP assessed the impact of Hurricane Sandy on processing securities transactions (e.g., order taking, order entry, execution, allocation, clearance and settlement) as well as delivery of funds and securities, client relations, financial and regulatory obligations and technology, among other topics. In addition, the SEC, the Commodity Futures Trading Commission (“CFTC”) and the Financial Industry Regulatory Authority (“FINRA”) jointly issued (“Joint Publication”) best practices and lessons learned guidance concerning business continuity planning that is more broadly applicable. The core message of the Risk Alert and the Joint Publication is that BCPs should be the result of careful and comprehensive planning, thorough preparation, strategic redundancy and geographic diversity applied to critical supply chain providers, good internal and external communications and testing.
Each of these publications identifies the same list of categories, which are reflected below. The Risk Alert is written as a series of suggestions concerning activities that were or were not effective, while the Joint Publication takes the form of “best practices” guidance.
Widespread Disruption Considerations
What Works
The Regulators credit firms that create and maintain comprehensive written BCPs that address critical systems customized for the firm’s particular business operations. BCPs that are the result of collaborative participation between Compliance and all business lines and operations units tend to be more effective. BCPs that provide employees with the ability to work remotely (especially when there is sufficient systems capacity to support the increased work load following a crisis) also can be more effective than those which do not. BCP effectiveness can be enhanced when the drafters contemplate widespread outage events of long duration and the loss of key personnel for an extended period.
What Does Not Work
By contrast, the Regulators note that insufficiently comprehensive BCPs and those that do not provide for mobile or remote access by employees are often ineffective.
Alternative Location Considerations
What Works
In the view of the Regulators, BCPs should provide for proactive initiation of backup or alternative sites and facilities. Firms also should consider locating backup or additional facilities on a different power grid or in a geographically diverse location. Redundant or mobile connectivity to the Internet is an important consideration.
The Regulators also noted that, in the event geographic diversity or an alternative facility is part of the BCP, it is important to adequately train staff and provide them with access to print versions of policies, procedures, contact lists, etc. Advance reservation of hotel rooms or alternative space can be useful.
What Does Not Work
On the other hand, the Regulators noted concerns with BCPs that concentrate technology, facilities and operations in one geographic region.
Vendor Relationships
What Works
The Regulators advise including in the BCP an inventory of critical vendor relationships, ranked according to risk, in advance of an event. As a part of the vendor due diligence process, inquiry should be made regarding the BCPs of critical suppliers.
BCPs should be tested annually and, to the extent possible, geographic diversity principles should be applied to the vendor BCP due diligence process.
What Does Not Work
The Regulators contrasted poor BCPs that have no information about suppliers and no current list of vendors and related contact information.
Telecommunications Services and Technology Considerations
What Works
The Regulators suggest that firms consider redundant infrastructure providers for telecommunications and electricity, remote access for employees with enough supporting operational and systems capacity to enable the work to be performed. This could include having multiple sources of key data accessible to employees remotely or consideration of a cloud computing solution (either of which will require addressing the related information security concerns and outsourcing contract compliance governance).
What Does Not Work
Do-it-yourself systems maintenance seldom is effective due to the risk that local staff may not be able to perform the tasks.
Communication Plans
What Works
The Regulators favored BCPs that provide for wide dissemination of contact information internally and externally, including contact information for customers, suppliers, regulators, SROs and market participants. A process should be created for updating websites and telephone answering messages while in contingency mode. Participation in industry groups also improves communication.
What Does Not Work
BCPs that lack clarity about roles and responsibilities of staff during a crisis and lack of ready-to-hand contact information are prone to failure in the event of an emergency.
Regulatory Compliance
What Works
BCPs that include regulatory compliance considerations and reporting requirements also found favor with the Regulators. These are even more effective when they are regularly updated to include new regulations and SRO rules.
What Does Not Work
BCPs that do not assure that firms are attending to regulatory obligations are viewed as insufficient.
Review and Testing
What Works
The Regulators suggest testing the BCP immediately prior to a crisis or activating contingency systems in anticipation of an event against expansive and imaginative scenarios. There are technology vendors who are in the business of helping organizations conduct realistic tabletop exercises to make testing more effective.
The Joint Publication also suggests including stress tests in the BCP. The Joint Publication indicates, for example, that “firms could perform a stress test on their liquidity position and review the level of excess customer reserves” and may wish to adjust cash reserves, as appropriate, in anticipation of an event.
What Does Not Work
By contrast, failing to test the BCP against critical business functions or against limited scenarios is a sign of weak BCPs.
Conclusion
The development of a BCP is complicated and contextual. The collected wisdom of the Regulators is very useful advice, but the guidance is not without its problems. For example, acquiring redundancy in infrastructure and vendor products will increase operating costs and may not be feasible for all firms or could detract from addressing other compliance needs. More mobile or remote solutions can increase the risk of information security lapses. Also, many suppliers keep the locations of their recovery sites confidential in order to reduce the risk of sabotage. Cloud computing solutions may create regulatory issues, such as compliance with time, place and manner requirements as to recordkeeping. Firms should consider the guidance, within their own contexts and operations, in creating, maintaining, updating, testing and implementing BCPs.
