order to continue operating \112\ or consider how it would implement a
reduction of expenses or other alternatives.
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    \111\ We note that, in certain circumstances, an adviser is
required to ``disclose any financial condition that is reasonably
likely to impair [the adviser's] ability to meet contractual
commitments to clients.'' See Form ADV, Part 2, Item 18.
    \112\ When considering any material financial resources
available to it, the adviser also could identify any insurance
coverage.
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f. Request for Comment
    We seek comment on the proposed requirement to adopt and implement
a business continuity and transition plan, and the proposed components
of that plan.
     Should we require all SEC-registered advisers to adopt and
implement business continuity and transition plans? Or should we
identify only a subset of SEC-registered advisers that must implement
such plans? Which advisers should be in such a subset (e.g., large
advisers with assets under management over a specific threshold,
advisers affiliated with financial institutions, etc.) and why?
     Rather than adopting the proposed rule, should the
Commission issue guidance under rule 206(4)-7 under the Advisers Act
addressing business continuity and transition plans? If so, should that
guidance set forth possible elements of such a plan?
     What, if any, implications will the proposed rule have for
investment advisers that are also subject to other regulatory
requirements as to business continuity and/or transition planning
(e.g., FINRA or CFTC rules on BCPs)? For example, would the proposed
rule be inconsistent with an adviser's obligations under other
regulatory requirements?
     Should we require business continuity and transition plans
to include each of the proposed components? Alternatively, should the
rule require advisers to have a business continuity and transition
plan, and specify certain components of a plan in the form of a safe
harbor provision? Or, should the rule not specify required components
of a plan and instead allow advisers to determine the appropriate
components of their plans? Are there any components we should remove
from the proposed list of required components? Are there any components
we should add or expand upon? For example, with respect to a pre-
arranged alternate physical location(s) of the adviser's office(s) and/
or employees, should we require that an adviser's business continuity
and transition plan include an alternate location at a specified
distance away from its primary location? Should we require an adviser's
communication plan to extend to investors in certain types of pooled
investment vehicles? If so, which specific types of pooled investment
vehicles and how should the term ``investors'' be defined for each type
of pooled investment vehicle? Should we require an adviser to have
policies and procedures that address the identification, assessment,
and review of critical third-party vendors that the adviser arranges or
oversees for its clients?
     Are there any components of the NASAA model rule or
guidance, or other rules or guidance addressing BCPs, that we have not
addressed in the proposed rule that we should address? Should advisers
with certain types of clients, including for example advisers to
registered investment companies or sponsors of wrap programs, be
required to undergo additional obligations with regard to adopting and
implementing a business continuity and transition plan? What additional
steps should such advisers be required to take with respect

to such clients and/or such clients' service providers?
     Are each of the proposed components of a business
continuity and transition plan clear or should we provide additional
information and/or definitions for any of the components? If so, what
additional information or definitions are needed? For example, should
we provide a definition of ``significant business disruption,''
``unable to continue providing investment advisory services,'' or
``pooled investment vehicle''? Alternatively, should we require
investment advisers to define certain terms, like ``significant
business disruption'' or ``unable to continue providing investment
advisory services,'' within their plans?
     Should all advisers be required to include each of the
proposed components in a business continuity and transition plan or
should certain advisers be exempt from including certain components? If
certain advisers should be exempt, why? For example, should only
certain advisers be required to adopt and implement the transition plan
component of the proposed rule or is there a subset of investment
advisers with operations so limited that the adoption and
implementation of a transition plan (or certain components of the
transition plan requirement) would not be beneficial? If so, what
criteria could be used to identify this subset of advisers? Are there
alternative or streamlined measures that these advisers could take to
facilitate an orderly transition in the event of a significant
disruption to the adviser's operations? If these advisers did not have
transition plans, should they be required to disclose the absence of
such plan?
     With respect to each of the proposed components of a
business continuity and transition plan, we have provided information
as to the items and/or actions that we believe generally should be
encompassed within a particular component. Is there additional
information that we should provide, or any information that we should
exclude or modify, regarding any of the proposed components of a plan?
Alternatively, instead of permitting advisers the flexibility to draft
their plans based on the complexity of their businesses, should we
require advisers to address each component in a prescriptive manner by
requiring specific mechanisms for addressing particular risks?
     Should we adopt a more prescriptive rule that calls for a
more specific transition plan similar to the ``Living Wills'' required
by the Federal Reserve Board and the FDIC for large banks and
systemically important non-bank entities? \113\ If so why, and what
specifically should the rule require?
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    \113\ These resolution plans require, among other things: (1)
Information regarding the manner and extent to which any insured
depository institution affiliated with the company is adequately
protected from risks arising from the activities of any nonbank
subsidiaries of the company; (2) full descriptions of the ownership
structure, assets, liabilities, and contractual obligations of the
company; and (3) identification of the cross-guarantees tied to
different securities, identification of the major counterparties,
and a process for determining to whom the collateral of the company
is pledged. See Resolution Plans, supra note 40.
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     As part of the proposed rule, should we require advisers
to provide disclosure to their clients about their business continuity
and transition plans? If so, what should be the format of such
disclosure (e.g., summary of plan, copy of plan)? When or how
frequently should this disclosure be provided? Should we require
advisers to disclose to their clients incidents where they relied on or
activated their business continuity and transition plans? If so, what
should be the format of such disclosure? What types of incidents should
be disclosed or not disclosed?
     As part of the proposed rule, should we require advisers
to report to the Commission incidents where they rely on their business
continuity and transition plans? If so, under what circumstances should
advisers be required to report to the Commission and how should
advisers report this information? When should the required reporting
occur?
     Should we require advisers to file their business
continuity and transition plans, or a summary thereof, with the
Commission? Should these filings be made available to the public? Why
or why not? Are business continuity and transition plans considered
proprietary to an adviser such that disclosing its plan to the public
(either through a Commission filing or through disclosure to a client)
creates additional risk exposure to the adviser?
2. Annual Review
    Under the proposed rule, each adviser would be required to review
the adequacy of its business continuity and transition plan and the
effectiveness of its implementation at least annually. The review
generally should consider any changes to the adviser's products,
services, operations, critical third-party service providers,
structure, business activities, client types, location, and any
regulatory changes that might suggest a need to revise the plan.
    The annual review provision is designed to require advisers to
evaluate periodically whether their business continuity and transition
plans continue to, or would, work as designed and whether changes are
needed for continued adequacy and effectiveness. For example, the
review generally should include an analysis of whether a business
continuity and transition plan adequately protects client interests
from being placed at risk and to mitigate such risks in the event the
adviser experiences a significant disruption in its operations. In
addition, annual reviews generally should address weaknesses an adviser
may have identified in any testing it has done or assessments that have
been performed to address the adequacy and effectiveness of its
business continuity and transition plan, as well as any lessons learned
if an event required the plan to be carried out during the previous
year, including any changes made or contemplated as a result of the
event.
     Should we require that business continuity and transition
plans be reviewed at least annually, as proposed? Should we expressly
require reviews of business continuity and transition plans to be
documented in writing? Should we require more frequent or less frequent
review of business continuity and transition plans? In addition to
annual review, should we require that advisers review their plans when
specific events occur? For example, should we require plans be reviewed
when an adviser has an event that causes it to rely on its plan? Should
we require plans be reviewed based on changes to the adviser's
operations or processes, changes in the ownership or business structure
of the adviser, compliance or audit recommendations, lessons learned
from testing or disruption events, and/or regulatory developments?
     Should we require advisers to report to the Commission
regarding the annual review of their business continuity and transition
plans? If so, what should be the format of the report?
     Should we explicitly require advisers to annually review
the business continuity and transition plans of their third-party
service providers that provide critical services to the adviser and its
clients? If so, how should these reviews be conducted? What types of
documentation could be requested to perform these reviews?
     Should we specifically require advisers to periodically
test their business continuity and transition plans or certain material
components thereof to assess whether the plans are adequate and
effective? If so, how should such testing be conducted? What should be

included in the scope of such review? How often should such testing be
required?
3. Recordkeeping
    The proposed amendments would require SEC-registered advisers to
maintain copies of all written business continuity and transition plans
that are in effect or were in effect at any time during the last five
years after the compliance date. We are requiring an adviser to
maintain a copy of the plan currently in effect because we believe that
it is important that advisers have easy access to necessary information
during periods of stress. The proposed rule would also require that
advisers keep any records documenting their annual review.\114\ Our
rules permit advisers to maintain these records electronically.\115\
These proposed new recordkeeping requirements will assist our
examination staff in evaluating an adviser's compliance with the new
rule, including evaluating whether the adviser's business continuity
and transition plan includes all required components. These proposed
requirements track the recordkeeping requirements under rule 204-2
regarding an adviser's compliance policies and procedures.
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    \114\ Pursuant to rule 204-2(e)(1) of the Advisers Act, advisers
would have to maintain any records documenting their annual review
in an easily accessible place for at least five years after the end
of the fiscal year in which the review was conducted, the first two
years in an appropriate office of the investment adviser.
    \115\ See rule 204-2(g) under the Advisers Act.
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    We request comment on the proposed recordkeeping requirements.
     Should we require advisers to maintain copies of their
business continuity and transition plans that are in effect or were in
effect at any time during the last five years, as proposed? If not,
what, if any, recordkeeping requirements should we adopt with respect
to business continuity and transition plans? Is five years an
appropriate retention period? Should it be longer or shorter? Why?
     Should we require advisers to keep any records documenting
their annual review of their business continuity and transition plans,
as proposed?

II. Economic Analysis

A. Introduction

    The Commission is sensitive to the potential economic effects of
proposed rule 206(4)-4 and the proposed amendments to rule 204-2. These
effects include benefits and costs to SEC-registered advisers, clients,
and fund investors as well as broader implications for market
efficiency, competition, and capital formation.\116\ The economic
effects of the proposed rule are discussed below in the context of the
primary goals of the proposed regulation.
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    \116\ The Commission recognizes that there are other entities
that could be affected by the proposed rule. For example, vendors
might have to adapt to meet the new demands of their clients under
the proposed rule and that could change the nature of those product/
service markets, which in turn could have further economic effects
on advisers and their clients and investors. However, the effects of
the rulemaking on such entities are uncertain and difficult to
predict given they are not direct effects of the proposed rule.
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    We have sought, where possible, to quantify the costs, benefits,
and effects on efficiency, competition, and capital formation expected
to result from the proposed regulations. However, as discussed below,
in certain cases, we were unable to quantify the economic effects
because we lack the information necessary to provide reasonable
estimates, such as the extent to which some advisers already have
business continuity or transition plans that would satisfy some or all
of the requirements of the proposed rule, the likelihood of business
disruptions, and the share of costs arising from the proposed rule that
advisers will pass through to its clients. Therefore, some of the
discussions below are qualitative in nature.
    Under the proposed rule, the content of an SEC-registered adviser's
business continuity and transition plan shall be based upon risks
associated with the adviser's operations and shall include policies and
procedures designed to minimize material service disruptions, including
policies and procedures that address the following: (1) Maintenance of
critical operations and systems, and the protection, backup, and
recovery of data; (2) pre-arranged alternate physical location(s) of
the adviser's office(s) and/or employees; (3) communications with
clients, employees, service providers, and regulators; (4)
identification and assessment of third-party services critical to the
operation of the adviser; and (5) plan of transition that accounts for
the possible winding down of the adviser's business or the transition
of the adviser's business to others in the event the adviser is unable
to continue providing advisory services. The proposed rule also
requires that each SEC-registered adviser review, no less frequently
than annually, the adequacy of its business continuity and transition
plan and the effectiveness of its implementation. In addition, the
proposed amendments to rule 204-2 under the Advisers Act requires these
advisers to make and keep records of all business continuity and
transition plans that are in effect or were in effect at any time
within the past five years.
    The goal of these proposals is to require that all advisers have
sufficiently robust plans to mitigate the potential adverse effects of
significant business disruptions or transition events. Specifically,
the proposed rule requires SEC-registered advisers to adopt plans
reasonably designed to protect clients and fund investors from the risk
that, in the wake of a significant business disruption or transition
event, advisers are unable to provide services and continue operations.
Such disruptions may put clients' and investors' interests at risk if,
for example, an adviser lacks the ability to make trades in a
portfolio, is unable to receive or implement directions from clients,
or its clients are unable to access their assets or accounts.
    Because clients and investors should be averse to these outcomes,
one might expect all advisers to already have plans in place to
minimize the risks posed by significant business disruptions or
business transitions without being legally required to do so. It
appears, however, that, in the context of business continuity and
transition plans, market pressures do not fully align the interests of
all advisers with those of their clients and fund investors, as staff
has observed that some advisers have adopted plans that may not be
sufficiently robust in light of the operational and other risks
specific to their businesses. Our staff's observations that business
continuity and transition plans are not uniformly robust suggest that
both advisers and their clients may not fully take into account, or
internalize, the potential benefits of comprehensive business
continuity and transition plans as well as the potential costs of
operating without them.
    There are several possible reasons for this misalignment. As an
initial matter, the types of business disruptions addressed by this
proposal are infrequent, and are not necessarily publicly observable
when they do occur; this may make it difficult for market participants
to fully internalize the ramifications of those events. For example, an
adviser that underestimates the likelihood of a significant disruption
or the harm it could cause to the viability of its business may not
believe the cost of a more robust business continuity plan is
justified. Furthermore, because many advisers may have never
experienced a significant business disruption, they might not properly
assess whether their existing plans are sufficiently robust. And while
some clients and investors may recognize the benefits of business

continuity planning and demand it of their advisers, others may not
fully understand these benefits due to the rarity of significant
disruptions.
    In addition, staff observations resulting from specific SEC
examinations are generally not made public, so any examination findings
identified with respect to one adviser's plan will generally provide no
guidance to other advisers, or to their clients and investors, as to
what robust plans might contain. Although Commission staff has
published alerts identifying overall observed weaknesses in advisers'
business continuity plans, those alerts provide aggregated, non-
specific information that may not inform advisers or their clients and
investors of the expected content of robust plans.\117\ Moreover, it is
possible that some advisers may not review those alerts and therefore
do not adjust their business continuity plans in response to the
identified strengths and weaknesses; similarly, many clients and
investors, particularly smaller or retail investors, may not review the
alerts and thus do not exert pressure on their advisers to address in
their own plans the general weaknesses identified by the
Commission.\118\
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    \117\ See, e.g., NEP Risk Alert, supra note 30.
    \118\ We note that, based on staff experience, large
institutional clients often have rigorous due diligence processes
that evaluate an adviser's operational and other risks, while
smaller retail clients may not engage in such a thorough review of
operational and other risks.
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    Furthermore, advisers generally do not make their business
continuity plans (or transition plans) public, though based on
Commission staff's experience, we understand that most will provide a
summary of those plans or other information related to their
operational and other risks to clients and investors upon request.
Clients and investors that request, review, and comment on these plans
are more likely to exert some degree of pressure on their advisers
regarding the content of their plans, thereby leading to more robust
plans. Thus, the composition of an adviser's client base may impact the
current state of its business continuity and transition plans and may
lead to the heterogeneity in the quality of such plans that our staff
has observed across advisers. The Commission believes, based on staff
experience, that larger institutional clients and investors, compared
to smaller or retail clients and investors, are more likely to engage
in extensive due diligence processes that involve such review of
existing plans. The content of business continuity and transition plans
for advisers with larger institutional clients and investors may
therefore be more likely to reflect such client or investor input than
plans of advisers with only smaller, retail clients or investors. In
addition, because plans are not generally public, advisers cannot
compare their own plans with those of other advisers to assess the
relative strengths and weaknesses of their plans and therefore do not
have the opportunity to craft or revise their own plans with the
knowledge of how others in the industry are addressing the same issues.
These factors, combined with the absence of any specified requirements
for components of business continuity plans (or transition plans) in
existing regulation, may have contributed to staff's observations that
such plans are not uniformly robust.
    Advisers also may not fully internalize the benefits of transition
planning. For example, it is possible that advisers do not necessarily
have adequate incentives to ensure that a business transition takes
into account all of the various components of a robust plan set forth
in the proposed rule, given that an adviser no longer receives fees
after that transition. In addition, transition events, like business
disruptions, are relatively rare; accordingly, advisers may not
properly assess the likelihood of such events, the potential
consequences of failing to adequately prepare, or the benefits of
ensuring a smooth transition.
    To address the issues identified above, the proposed rule requires
advisers to assess the operational and other risks associated with its
business operations and identifies components that must be addressed in
business continuity and transition plans. The rule aims to address the
lack of uniformly robust plans previously observed by staff and
requires each SEC-registered investment adviser to adopt and implement
a written business continuity and transition plan based upon the risks
associated with the adviser's operations.

B. Economic Baseline

    The investment adviser regulatory regime currently in effect serves
as the economic baseline against which the benefits and costs, as well
as the impact on efficiency, competition, and capital formation of the
proposed rule are discussed. As of January 4, 2016, there were 11,956
SEC-registered investment advisers with approximately $67 trillion in
regulatory assets under management. In this market, which has been
described as being highly competitive,\119\ advisers are likely to
compete on, among other things, fees charged to clients, returns or
performance, and the level of services provided to meet client needs.
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    \119\ See supra section I.A and note 7.
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    The proposed rule would affect all SEC-registered investment
advisers, as well as each adviser's clients (including registered
funds, private funds, and individual separately managed accounts) and
the investors in fund clients. Currently, Commission guidance indicates
that an SEC-registered adviser's compliance policies and procedures
should include business continuity planning to the extent it is
relevant to the adviser's business. The content of those BCPs, however,
is not addressed by current Commission rules, and may not specifically
include policies and procedures regarding business transitions.
    As noted previously, our staff has noticed variation in the
business continuity and/or transition plans that they have seen during
examinations. Some advisers, pursuant to the Compliance Program Rule or
as a prudent business practice, have adopted plans which may be
consistent with the new requirements being proposed, while others have
not. Accordingly, the benefits and costs to a given adviser, client, or
fund investor will depend on the current state of the adviser's
business continuity and transition plan.

C. Benefits and Costs and Effects on Efficiency, Competition, and
Capital Formation

    Taking into account the goals of the proposed rule and the economic
baseline, as discussed above, this section explores the benefits and
costs of the proposed rule, as well as the potential effects of the
proposed rule on efficiency, competition, and capital formation.
1. Benefits
    Clients and investors in funds managed by SEC-registered advisers,
advisers themselves, and the financial markets as a whole may benefit
from the proposed rule. In general, we cannot quantify the total
benefits to the affected parties because we lack data on certain
factors relevant to such an analysis, such as investor preferences and
the likelihood of business disruptions. For example, without knowing
how risk averse clients are to investing via advisers without robust
BCPs, we cannot quantify the benefits they might derive from
improvements in those BCPs. Similarly, it is difficult to estimate the
probability of the types of business disruptions addressed by the
proposed rule, which precludes precisely estimating the ex-ante costs
of inadequate plans under the economic

baseline. However, we discuss the expected benefits qualitatively
below.
    We anticipate that clients and investors in funds managed by
registered advisers will benefit from the proposed rule. Requiring SEC-
registered advisers to adopt and implement business continuity and
transition plans will likely reduce the risk that investors and
advisory clients will be harmed or affected in the event a business
continuity or transition issue actually occurs. For example, advanced
planning to address issues in the event of a disruption may reduce the
risk that advisory accounts might be left unmanaged or that clients do
not have access to their funds during an adviser's business
interruption or transition, or at least shortens the time of such a
disruption. As discussed above, whether it is due to prudent business
practices or adherence to the Commission guidance in the Compliance
Program Rule, some advisers may already have robust business continuity
and transition plans in place that are consistent with the new
requirements being proposed. The incremental benefits of the proposed
rule to those advisers' clients and investors would likely be less than
the benefit to the clients and investors of an adviser without such
strong operational controls.
    The proposed rule will also benefit registered advisers by
requiring their business continuity and transition plans to include
policies and procedures that address certain specific components, which
should help the advisers better prepare for significant disruptions in
their operations. While Commission guidance indicates that an SEC-
registered adviser's compliance policies and procedures should address
BCPs to the extent that they are relevant to an adviser, the Commission
has not previously specified what such a BCP should address. To the
extent registered advisers have not already adopted and implemented
robust BCPs that are consistent with the new requirements being
proposed, requiring them to review the risks associated with their
operations and plan for significant business disruptions or transitions
should encourage them to enhance their ongoing efforts to mitigate
risks attendant with their operations and business practices and may
help them be better prepared to address business continuity and
transition events if and when they occur.
    Finally, the proposed rule and the planning it requires of advisers
could have ancillary benefits for the broader financial markets. For
example, consider an adviser with significant assets under management
who trades actively enough to be considered a liquidity provider in a
particular market. If this adviser were to suffer a significant
business disruption event that prevented it from participating in that
market for several days, then the liquidity of the market could be
negatively affected.\120\ While a business continuity and transition
plan would not be able to completely prevent such a disruption, it may
decrease the adviser's recovery time and hence the disruption's impact
on the market.
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    \120\ See, e.g., George O. Aragon & Philip E. Strahan, Hedge
funds as liquidity providers: Evidence from the Lehman bankruptcy,
J. Financ. Econ., Vol. 103, Issue 3 (Mar. 2012) at 570-587
(concluding that ``the market liquidity of stocks held by Lehman's
hedge-fund clients fell more during the [2008 financial] crises than
otherwise similar stocks not held by these funds.'')
---------------------------------------------------------------------------

2. Costs
    As with the benefits, costs of the proposed rule will be shared by
advisers and their clients and fund investors. Generally, advisers will
incur the direct costs associated with developing and maintaining
robust business continuity and transition plans, though some of those
costs may ultimately be passed through to their clients and fund
investors. These costs are discussed in more detail below.
a. Costs to Advisers
    Proposed rule 206(4)-4 likely will result in an SEC-registered
adviser incurring one-time and ongoing operational costs, described in
detail below, to adopt and implement a business continuity and
transition plan that is reasonably designed to address the operational
and other risks related to a significant disruption in the adviser's
operations. As an initial matter, it is difficult to determine the
estimated costs for advisers with precision because of the variation in
existing BCPs and the extent to which such plans will need to be
revised to be compliant with the proposed rule. Because Commission
guidance indicates that SEC-registered advisers' compliance policies
and procedures should address BCPs to the extent that they are relevant
to an adviser, the nature of an adviser's existing BCP will also
greatly affect the initial costs the adviser would expend to comply
with the proposed rule. Advisers whose current BCPs are closely aligned
with the requirements of the proposed rule would likely incur lower
initial compliance costs relative to advisers whose current BCPs are
not closely aligned with the rule's requirements, while all advisers
would incur ongoing costs pertaining to the annual review and
recordkeeping components of the proposed rule. \121\
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    \121\ The costs estimates provided in this section include total
costs for developing and maintaining both business continuity plans
and transition plans. We recognize, however, that the portion of
these costs attributable to business continuity plans will likely be
greater than that attributable to the transition plans, as business
continuity plans generally contemplate acquiring and maintaining,
for example, more infrastructure, such as secondary storage
capabilities, than transition plans and is more likely to involve
retaining third-party vendors to assist with the development or
maintaining of that infrastructure. Accordingly, the current state
of an adviser's business continuity plans may have more effect on
the costs to individual advisers than the current state of the
adviser's transition plans.
---------------------------------------------------------------------------

    In addition, because the proposed rule requires an SEC-registered
adviser's plan to be based on the particular risks attendant to that
adviser's operations, the initial and ongoing costs imposed by the rule
would vary significantly among firms depending on the complexity of the
adviser's operations. A number of factors pertaining to an adviser's
business model can affect the complexity of the adviser's operations.
Those factors include the adviser's assets under management, number of
employees, number of offices, number and types of clients (e.g., high
net worth individuals, private funds, or registered investment
companies), types of advisory activities, other business activities or
lines of business which may affect the adviser's advisory business,
types of investment strategies pursued, and the extent of reliance on
service providers (in-sourced vs. out-sourced models). The flexibility
of the proposed rule should allow advisers to tailor their business
continuity and transition plans to the specific risks their businesses
face at the minimum possible cost.
    The Commission believes that certain of the above factors may be
correlated with the adviser's amount of assets under management. For
example, an adviser with a large amount of assets under management is
more likely to have more employees, multiple locations, offices,
numbers and types of clients, and types of business activities than an
adviser with fewer assets under management.\122\ Accordingly, we

believe that advisers with larger amounts of assets under management
are generally more likely to have more complex business operations and
may therefore need to expend more resources on adopting, implementing,
and maintaining a business continuity and transition plan than advisers
with fewer assets under management.\123\
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    \122\ With regard to employee size, SEC-registered advisers with
less than $100 million in assets under management have an average of
28 employees and a median of 4 employees, while SEC-registered
advisers with over $1 billion in assets under management have an
average of 180 employees and a median of 31 employees. Based on data
from IARD as of January 4, 2016. With regard to the number of
offices maintained by advisers, only 23% of SEC-registered advisers
with less than $100 million in assets under management maintain more
than one office, while 47% of SEC-registered advisers with over $1
billion in assets maintain one or more offices and 11% of these
larger advisers maintain 5 or more offices. Based on data from IARD
as of January 4, 2016.
    \123\ There are notable exceptions: for example, a small adviser
with a technology intensive investment strategy may nevertheless
have a complex operational risk profile, which could require a more
complex business continuity and transition plan.
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i. One-time Costs
    As noted above, the one-time costs associated with developing and
implementing the policies and procedures associated with a business
continuity and transition plan will vary significantly among firms
depending on the nature and complexity of the adviser's operations and
the current state of their systems and processes. Under the proposed
rule, SEC-registered advisers need only take into account the risks
associated with their particular operations. For example, smaller
advisers that do not have a large number or different types of clients
or do not maintain numerous offices with numerous employees may not
need complex systems if their operations result in risks that are easy
to address. On the other hand, a larger adviser with a large number and
diverse set of clients, including large registered investment
companies, with global offices and thousands of employees may need more
complicated and expensive systems and technology. To the extent that
adviser size does correlate with operational complexity, SEC
examination staff has observed that larger advisers have typically
already devoted significant resources to establish systems or
technological solutions that address operational and other risks
related to business continuity.
    Based on our staff's experience, we generally estimate that the
one-time costs necessary to adopt and implement a business continuity
and transition plan would range from approximately $30,000 to $1.5
million \124\ per SEC-registered adviser, depending on the facts and
circumstances of a particular adviser's operations and the adequacy of
its existing plan. These estimated costs include internal and external
costs, explained in more detail below, attributable to the following
activities: (1) Mostly internal costs associated with developing
policies and procedures related to each required component of the
business continuity and transition plan; and (2) external costs
associated with integrating and implementing the policies and
procedures as described above (including establishing or upgrading
current systems and processes to comply with the proposed rule).
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    \124\ These estimates are based on the aggregated low-end of the
range and the high-end of the range, respectively, of mostly
internal costs detailed in the PRA section below and the external
costs associated with integrating and implementing the plan.
Specifically, these estimates are based on the following
calculations, which are described in greater detail in notes 125
through 129:
     $12,515 low-end estimated internal cost to adviser for
developing policies and procedures + $4,000 low-end estimated cost
to adviser for external professional fees for developing policies
and procedures + $1,000 low-end estimated cost to adviser for
maintenance of critical operations and systems and the protection,
backup and recovery of data + $5,000 low-end estimated cost to
adviser for a prearranged alternative physical location + $0 low-end
estimated cost to adviser for a plan of communication + $5,000 low-
end estimated cost for third-party oversight = $27,515.
     $147,310 high-end estimated internal cost to adviser for
developing policies and procedures + $20,000 high-end estimated cost
to adviser for external professional fees for developing policies
and procedures + $750,000 high-end estimated cost to adviser for
maintenance of critical operations and systems and the protection,
backup and recovery of data + $500,000 high-end estimated cost to
adviser for a prearranged alternative physical location + $5,000
high-end estimated cost to adviser for a plan of communication +
$50,000 high-end estimated cost for third-party oversight =
$1,472,310.
     See infra, notes 125 through 129.
---------------------------------------------------------------------------

    We anticipate that developing policies and procedures designed to
minimize material service disruptions, including those related to each
required component of the business continuity and transition plan will
largely be done internally because it will require an evaluation of the
adviser's business operations most suited to be conducted by in-house
employees familiar with the intricacies of the business operations.
These costs are quantified and discussed in more detail in the PRA
section below, but in summary, we estimate that this initial one-time
cost will range from approximately $17,000 to $170,000, depending on
the facts and circumstances of a particular adviser's operations and
the comprehensiveness of their existing plan.\125\
---------------------------------------------------------------------------

    \125\ See infra section III.A.1. This estimate is based on the
following calculations: $12,515 internal cost to representative
smaller adviser + $4,000 in external professional fees for
representative smaller adviser = $16,515. $147,310 internal cost to
representative larger adviser + $20,000 in external professional
fees for representative larger adviser = $167,310.
---------------------------------------------------------------------------

    With respect to integration and implementation of the policies and
procedures described above, an adviser may incur external costs to
upgrade systems and processes. The external costs incurred by an
adviser to meet the required components of the proposed rule would be
directly affected by the current state of the adviser's existing
systems and processes. For example, the proposed rule specifies that an
adviser must address the maintenance of critical operations and systems
and the protection, backup, and recovery of data. While our staff
observes that most advisers already have systems in place to address
the protection, backup, and recovery of data, an adviser that does not
already have a system in place would incur the costs associated with
implementing an operational solution to protecting its data.\126\ Also,
the proposed rule specifies that an adviser's plan include a pre-
arranged alternative physical location of its office(s) and/or
employees. While many advisers already have back-up locations
identified as a co-location in times of business disruptions and
equipped their employees to telework if they are unable to travel to
the primary office location, an adviser that has not adequately
addressed this component of the proposed rule would incur costs to do
so in light of the proposed rule.\127\
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    \126\ We estimate an adviser could spend between $1,000 and
$750,000 to address the maintenance of critical operations and
systems, and the protection, backup and recovery of data. The wide
range is attributable to the varying methods in which advisers may
address this component of the proposed rule. For example, smaller
advisers may address data backup and recovery by outsourcing storage
to a service provider through cloud software, while a large adviser
dealing with large amounts of data may find it more cost effective
to purchase data servers dedicated to the adviser.
    \127\ We estimate that an adviser could spend between $5,000 and
$500,000 to address having a prearranged alternative physical
location. The wide range is attributable to the varying methods in
which advisers may address this component of the proposed rule. For
example, a smaller adviser with minimal employees may be able to
function by enabling its employees to telework and access the
adviser's systems remotely instead of requiring formal meeting
space. Larger advisers with many employees, on the other hand, may
need to rent office space on a temporary basis or establish co-
locations where employees necessary to the operations of an adviser
may congregate.
---------------------------------------------------------------------------

    The proposed rule also requires that the adviser address how it
will communicate with clients, employees, service providers, and
regulators in the event of a business disruption. While advisers have
communication tools as part of its general business operations that
enable it to communicate to its stakeholders (i.e., email, phone,
etc.), some advisers may have formal, more sophisticated communication
infrastructure already in place.\128\ The

proposed rule further requires advisers to engage in an assessment of
critical third-party vendors, including assessing how service providers
will maintain business continuity when faced with significant business
disruption. While some advisers currently have robust vendor management
programs that take steps to evaluate the resiliency of vendors,
including reviewing information regarding their BCPs, due diligence
questionnaires or assurance control reports from an independent party,
and onsite visits, some advisers do not and will need to incur costs to
enhance their review of critical third-party vendors.\129\
---------------------------------------------------------------------------

    \128\ We estimate that an adviser could spend between almost
nothing to up to $5,000 to address having a plan of communication
with its stakeholders. The wide range is attributable to the varying
methods in which advisers may address this component of the proposed
rule. For example, a small adviser with minimal employees could
manually email or telephone its stakeholders, whereas a large
adviser with many employees or clients could choose to use an
automated system to trigger a pre-programmed communication plan.
    \129\ We estimate that an adviser could spend between $5,000 and
$50,000 to address the requirement for third-party oversight. The
wide range is attributable to the varying methods in which advisers
may address this component of the proposed rule. As discussed in
section I, many advisers may choose to use in-house personnel to
conduct due diligence of critical service providers, while others
may choose to pay others to conduct such due diligence on their
behalf.
---------------------------------------------------------------------------

    Aggregating our estimates for the various components of the rule,
we estimate that SEC-registered advisers may spend between
approximately $11,000 and $1.3 million in additional, initial costs to
upgrade systems and processes to comply with the proposed rule
depending on the complexity of their operations and the current state
of their systems and processes, as described above.\130\
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    \130\ These estimates are based on the aggregated low-end of the
range and the high-end of the range, respectively, of mostly
internal costs detailed in the PRA section below and the external
costs associated with integrating and implementing the plan.
Specifically, these estimates are based on the following
calculations:
     $1,000 low-end estimated cost to adviser for maintenance of
critical operations and systems and the protection, backup and
recovery of data + $5,000 low-end estimated cost to adviser for a
prearranged alternative physical location + $0 low-end estimated
cost to adviser for a plan of communication + $5,000 low-end
estimated cost for third-party oversight = $11,000.
     $750,000 high-end estimated cost to adviser for maintenance of
critical operations and systems and the protection, backup and
recovery of data + $500,000 high-end estimated cost to adviser for a
prearranged alternative physical location + $5,000 high-end
estimated cost to adviser for a plan of communication + $50,000
high-end estimated cost for third-party oversight = $1,305,000.
    See supra, notes 125 through 129.
    These estimates include the assumption that large advisers will
incur more costs than smaller advisers based on their operational
risk profile. Because these estimates do not take into account our
staff observations that larger advisers generally already have more
robust business continuity plans in place compared to smaller
advisers, we believe our estimates may overstate the costs to be
incurred by advisers.
---------------------------------------------------------------------------

ii. Ongoing Costs
    In addition to the one-time initial costs described above, each
registered adviser would also incur ongoing costs as a result of the
proposed rule related to the adviser's review of the adequacy of its
business continuity and transition plan and the effectiveness of its
implementation. This would involve internal costs associated with
updating policies and procedures to reflect changes in an adviser's
operational risk profile and costs of compliance and reporting
associated with maintaining the plan, but would also include external
costs associated with maintaining and upgrading systems, maintaining
alternate work locations, and responding to regulatory changes that
require revision of the adviser's business continuity and transition
plan.\131\ As discussed in the PRA section below, based on staff
experience, we estimate that each adviser, in addition to the initial
costs described above, would incur ongoing plan-related cost of
approximately 25% of the adviser's initial costs in adopting and
implementing a business continuity and transition plan. Accordingly, we
estimate that an SEC-registered adviser would incur ongoing annual
costs associated with the proposed rule that would range from $7,500 to
$375,000.\132\
---------------------------------------------------------------------------

    \131\ See supra section I.C.2 for more details on annual review
requirements.
    \132\ This estimate is based on the following calculations: .25
x $30,000 = $7,500 and .25 x $1.5 million = $375,000. See supra note
124 and accompanying text (discussing total initial costs ranging
from approximately $30,000 to $1.5 million).
---------------------------------------------------------------------------

    In addition, the proposed amendments to rule 204-2 would require
registered advisers to maintain records related to the current plan and
any plan in effect in the previous five years, as well as any records
documenting the annual review of the plan required by the rule. As
described in more detail in the PRA section below, we estimate that
such advisers will spend approximately $150 each year on an ongoing
basis to meet this requirement.
b. Costs to Clients and Investors
    Some of the costs incurred by advisers as a result of the proposed
rule may ultimately be passed on from advisers to clients and fund
investors through higher fees. The extent to which costs are
transferred to clients and investors depends on several factors,
including the supply and demand for adviser services. On the demand
side, the extent to which clients and investors respond to fee changes
is a function of how highly they value a given adviser's services; the
proposed rule may increase this valuation if investors value business
continuity and transition plans and hence increase the demand for
adviser services at a given fee, but the exact nature of this potential
shift and its impact on fees is unknown.\133\ On the supply side, if
advisers take investor fee sensitivity into account, under many
plausible competition scenarios in an adviser's market segment, it is
likely at least some of the cost increases of the proposed rule will be
passed on to clients and investors. However, if advisers incur costs
associated with changing fees, advisers may not pass on the costs of
the proposed rules until they cross some significant threshold. Since
we do not have data or other information concerning individual investor
fee sensitivities, how advisers take these into account, or the extent
to which advisers prefer to keep fees constant, the potential shift in
the supply of advisory service and its impact on fees is unknown.
---------------------------------------------------------------------------

    \133\ See, e.g., John Haslem, Mutual Fund Heterogeneity and Fee
Dispersion, J. Wealth. Manag., Vol. 18, No. 1 (Summer 2015) at 41-
48, who argues that because preferences differ across investors, fee
sensitivity also varies across investors.
---------------------------------------------------------------------------

3. Effects on Efficiency, Competition, and Capital Formation
    The Commission has also considered the effects of the proposed
rules on efficiency, competition, and capital formation. With respect
to efficiency, to the extent that a disruption were to prevent an
adviser from executing trades for several days, investors would be
unable to make any changes in their investment choices, leading to a
potentially inefficient allocation of their capital during this period.
To the extent that the proposed rules decrease the recovery time of a
disruption for an adviser that many market participants are relying on
when conducting their business, they could promote efficient pricing of
risk and thus efficient capital allocation during such an event.
    The proposed rule also could affect competition in the advisory
industry. As discussed above, the costs of adopting plans that meet the
requirements of the proposed rule will vary depending on an adviser's
operations and the extent to which they have already implemented
business continuity and transition plans consistent with the rule. To
the extent that, in a given market segment, advisers with high adoption
costs compete for clients and investors against advisers with low
adoption costs, the proposed rule will disproportionally affect the
high adoption cost advisers. If some of these advisers are only
marginally

profitable, they may exit that market segment. Similarly, the proposed
rule could, on the margin, raise the barrier to entry for an adviser
that otherwise would have entered a given market segment. If the rule
results in either adviser exits or increased barriers to entry, reduced
competitive pressures could result in increased fees for clients and
investors.
    Finally, the proposed rule may have a small but positive impact on
capital formation. Ex-ante, reducing risks to clients and investors
associated with business disruptions and transition events could
increase such clients' and investors' willingness to invest via
advisers, which could be beneficial to capital formation if advisers
are more skilled than those clients or investors at identifying sound
investment opportunities. In addition, to the extent that the rules
reduce any risk premium in assets associated with business disruptions
and transition events as discussed above, more robust business
continuity and transition plans could promote capital formation.

D. Reasonable Alternatives

    In formulating our proposal, we have considered various reasonable
alternatives to certain individual elements of proposed new rule
206(4)-4 and the proposed amendments to rule 204-2. Those alternatives
are discussed below. We have also requested comments relating to
certain specific aspects of these alternatives, as noted above.
1. Require Public Availability of Business Continuity and Transition
Plans
    First, the Commission could require that SEC-registered advisers
publicly disclose a summary of the plans required by the proposed rule
in their Form ADVs, and either additionally or as an alternative,
provide their business continuity and transition plans to clients upon
request. In addition, as an alternative to the recordkeeping
requirement, we could require registered advisers to file their
business continuity and transition plans (or a portion or summary
thereof) with the Commission.
    Disclosing the plans or a summary of those plans, and the
operational and other risks addressed by such plans, could help
investors evaluate and compare the operational and other risks
associated with particular advisers. If investors could choose among
advisers in part based on the level of operational and other risk
advisers were willing to bear, advisers might be further incentivized
to plan for business disruption events. However, we understand that
such information could be considered proprietary by some advisers and
the public disclosure of business continuity and transition plans may
make advisers more vulnerable to attacks from third parties, such as
cybersecurity attacks that target the contingency plans laid out in an
adviser's business continuity and transition plan. Furthermore,
advisers would incur additional monetary costs associated with the
disclosure of the plans. Such costs associated would vary depending on
the type of disclosure required (e.g., filing with the Commission,
publication on the adviser's Web site, making the plans available upon
request, etc.) and whether the adviser currently makes its plans
available to clients.
    In addition, instead of requiring certain components for business
continuity plans for all advisers, as in the proposed rule, the
Commission could continue imposing only the obligation generally set
forth as guidance under the Compliance Program Rule but require public
disclosure of any business continuity plans adopted pursuant to that
rule. As noted above, the proposed rule's enhanced requirements for
business continuity plans impose costs compared to the existing
baseline, depending on an adviser's current business continuity plans,
so this alternative would avoid the costs associated with complying
with the proposed rule. Still, advisers would incur other costs related
to disclosure of the existing business continuity plans, as noted
above, including the direct monetary costs of publishing or providing
the plans, as well as indirect costs such as those associated with
revealing the proprietary or sensitive business information identified
above.
    Further, as discussed above, the non-public nature of existing
business continuity plans may be a contributing factor to the lack of
uniformly robust plans observed by Commission examiners. However, given
the other factors discussed above that may also contribute to the lack
of sufficiently robust plans among all advisers, the Commission
preliminarily believes that only requiring public disclosure of
existing business continuity plans without specifying certain
components that plans must contain may not fully address its concerns
that all advisers have not established sufficiently robust business
continuity plans. At the same time, the Commission preliminarily
believes that requiring business plans to address the components
identified in the proposed rule while not mandating that such plans
also be publicly disclosed will result in more uniformly robust plans
that address the Commission's concerns.
2. Require Business Continuity Plans and/or Transition Plans, But Do
Not Specify Required Components
    The Commission could also specifically require advisers to adopt
business continuity plans and/or transition plans but be silent as to
the required components that such plans must contain to address
business disruptions and/or transition events.\134\ The proposed rule
requires advisers to adopt and implement a business continuity and
transition plan with policies and procedures reasonably designed to
address operational and other risks related to a significant disruption
in an adviser's operations (including policies and procedures
concerning business transition), while also identifying specific
components that such a plan must address. If, as an alternative, the
Commission required business continuity and transition plans but did
not identify any specific components the plans must address, registered
advisers would have complete flexibility in determining how to best
prepare for and respond to business disruptions and transition events.
For example, it is possible that certain required components for
business continuity and transition plans identified in the proposed
rule are less relevant to some advisers, but all advisers would be
required to address each of the components under the proposed rule. In
contrast, an alternative that did not require specific components be
addressed would enable advisers to tailor the plans to their specific
business needs, which could potentially result in cost and time-savings
compared to the proposed approach.
---------------------------------------------------------------------------

    \134\ The Commission could take different approaches for
business disruptions and transition events. For example, the
Commission could either retain the currently proposed approach of
specifying certain components for addressing business disruptions or
impose more specific mechanisms for addressing certain risks
associated with business disruptions, as explained below, while not
specifying either the components or the specific mechanisms for
addressing transition events.
---------------------------------------------------------------------------

    However, based on the Commission's experience with not providing
specific components a plan should address in the context of business
disruptions, under rule 206(4)-7, the Commission is concerned that some
registered advisers may not implement sufficiently robust plans to best
protect the interests of their clients and investors during a business
disruption or transition event if the Commission does not specify

certain components. In contrast, the Commission preliminarily believes
that the current proposed approach strikes an appropriate balance
between specifying certain components of business continuity and
transition planning that must be addressed while still providing
advisers with flexibility in how to address each of those components
and any other operational and other risks that may be relevant to the
adviser's operations. In addition, the Commission preliminarily
believes that advisers will achieve certain efficiencies in
simultaneously addressing both business disruptions and transition
events under the proposed approach, which may mitigate additional costs
imposed by the proposed approach.
3. Require Specific Mechanisms for Addressing Certain Risks in Every
Plan
    As discussed above, we are proposing a rule that requires SEC-
registered advisers to address certain general components, but permits
them the flexibility to draft their business continuity and transition
plans based on the risks associated with their particular operations.
We could alternatively include in the rule prescriptive requirements
mandating precisely how registered advisers must address certain
specified risks related to either business disruptions or transition
events, or both.\135\
---------------------------------------------------------------------------

    \135\ As noted above, the Commission could vary its approach for
business continuity and transition plans. Specifically, for both
business continuity plans and transition plans, the Commission could
either (1) retain the more flexible component-based approach
currently proposed, (2) mandate specific requirements for addressing
business disruptions/transition events, or (3) only require
``reasonably designed'' plans without specifying particular
components.
---------------------------------------------------------------------------

    Specific, mandatory requirements could potentially reduce confusion
as to exactly how these advisers are expected to address business
disruptions and/or transition events. However, as discussed above, we
recognize that advisers' business models and operations vary and that
the manner in which each adviser's business continuity and transition
plan addresses a required element will depend upon the nature and
complexity of the adviser's business. Therefore, a prescriptive one-
size-fits-all rule mandating how all advisers must address certain
specified risks, including risks a particular business model and
operation would not be exposed to, could be inefficient and cause some
advisers to incur unnecessary costs by requiring them to address
requirements that are not relevant to their specific business. In
addition, a prescriptive rule provides less flexibility for registered
advisers to address new issues as they arise, particularly concerning
changes in technology, again potentially leading to inefficient
constraints on how registered advisers prepare for and address various
risks. Therefore, we preliminarily believe our proposed approach
strikes an appropriate balance between requiring that each adviser have
a business continuity and transition plan that addresses certain
required components we believe will help SEC-registered advisers to
appropriately plan for significant business disruptions and transition
events while, at the same time, allowing each adviser the necessary
flexibility in creating a business continuity and transition plan to
take into account the adviser's own unique operations, the nature and
complexity of its business, its clients, and its key personnel.
4. Vary the Requirements of the Proposed Rule for Different Subsets of
Registered Advisers
    Additionally, instead of requiring that all SEC-registered advisers
adopt and implement the business continuity and transition plans with
the same exact components, we could vary those requirements by adviser.
For example, the Commission could provide that various requirements of
the rule only apply to a subset of registered advisers (e.g., advisers
over a certain asset threshold, advisers that are engaged in activities
that the Commission deems to be risky, advisers that are affiliated
with other financial industry participants, such as broker-dealers or
banks, etc.), or it could provide that certain advisers (such as
smaller advisers) are exempted from the rule entirely. As we have
discussed above, different types of advisers have different types of
operational and other risks and it is possible that requiring every
adviser to address each of the risks identified in the proposed rule,
even those that may be less likely for certain advisers, could result
in unnecessary costs for those advisers.
    However, the overall purpose of the proposed rule is to provide
enhanced protection to clients and investors by requiring all
registered advisers to establish sufficiently robust plans, and
tailoring the rule to require different components for different types
of advisers may result in the interests of some clients and investors
not being adequately protected. Specifically, it is possible that, when
distinguishing different ``types'' of advisers, any boundaries drawn
would be imperfect and any groups of advisers identified by such a rule
would themselves not be homogenous, resulting in under or over-
inclusive groups. This could result in some clients and investors not
receiving adequate protections, while still imposing unnecessary costs
on others. In contrast, the proposed rule allows advisers the
flexibility to address each required component to the degree that
reflects the nature of each particular adviser's business. Accordingly,
the Commission believes that the proposed rule strikes an appropriate
balance in providing that protection while minimizing the costs of
compliance to advisers in ways that would not undermine the
Commission's regulatory goals.

E. Request for Comment

    We request comment on our assumptions regarding the costs and
benefits of the proposed rule. We request comment on whether the
proposed rule, if adopted, would impose a burden on competition. We
also request comment on whether the proposed rule, if adopted, would
promote efficiency, competition, and capital formation. Commenters are
requested to provide empirical data to support their views. In addition
to our general request for comment on the costs and benefits of the
proposed amendments, we request the following specific comment on
certain aspects of our economic analysis.
     To what extent would advisers and their clients and
investors benefit from business continuity and transition plans that
are required to contain certain specific components? Please explain.
     Would advisers, and their clients and investors, benefit
more from requiring plans to address certain risks in a specified
manner, rather than providing for flexibility as in the proposed rule?
     Do commenters expect that advisers would incur costs in
addition to, or that differ from, the costs we outlined above for both
one-time and ongoing costs? Please explain.
     Would any of the effects and costs of the proposed rule be
large enough to affect the behavior of investment advisers or their
clients? For example:
    [cir] Do commenters expect that some advisers may choose to exit
the market rather than incur the costs associated with compliance? If
so, what segment of the investment adviser market is this mostly likely
to be seen in and how many exiting advisers should we expect? Please
explain.
    [cir] Will the costs to clients, in the form of increased fees,
result in some clients no longer employing the services of advisers? If
so, what types of clients would be most likely to take such actions?
Please explain.

     Do commenters believe that the alternatives the Commission
considered are appropriate? Are there other reasonable alternatives
that the Commission should consider? If so, please provide additional
alternatives and how their costs and benefits would compare to the
proposal.
     Do commenters believe that the analysis of the associated
costs and benefits of the alternatives is accurate? If not, please
provide more accurate costs and benefits, including any data or
statistics that supports those costs and benefits.

III. Paperwork Reduction Act

    The proposed rule and rule amendments under the Advisers Act
contain ``collections of information'' within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\136\ The title for the new
collection of information is ``Rule 206(4)-4.'' In addition, the
proposed amendments to rule 204-2 would impact the currently approved
collection of information titled ``Rule 204-2,'' under OMB control
number 3235-0278. These collections of information are mandatory for
all investment advisers registered with the Commission. The Commission
is submitting these collections of information to the OMB for review in
accordance with 44 U.S.C. 3507 (d) and 5 CFR 1320.11. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number.
---------------------------------------------------------------------------

    \136\ 44 U.S.C. 3501 through 3521.
---------------------------------------------------------------------------

    The collection of information under rule 206(4)-4 is designed to
increase the likelihood that advisers are as prepared as possible to
continue operations on an ongoing basis and to meet client expectations
and legal obligations in the event of a significant disruption to their
operations. The respondents are investment advisers registered with the
Commission. Responses provided to the Commission in the context of its
examination and oversight program are generally kept confidential.\137\
---------------------------------------------------------------------------

    \137\ See section 210(b) of the Advisers Act.
---------------------------------------------------------------------------

    The collection of information under rule 204-2 is necessary for the
Commission staff to use in its examination and oversight program. The
respondents are investment advisers registered with us. Responses
provided to the Commission in the context of its examination and
oversight program are generally kept confidential.\138\ The records
that an adviser must keep in accordance with the proposed rule must be
retained for at least five years.\139\
---------------------------------------------------------------------------

    \138\ See section 210(b) of the Advisers Act.
    \139\ See proposed rule 204-2(a)(20).
---------------------------------------------------------------------------

A. The Proposed Rules

1. Rule 206(4)-4
    As discussed in section II, we estimate that each adviser would
include one-time initial costs to adopt and implement a written
business continuity and transition plan, as well as ongoing plan-
related costs. There are currently approximately 11,956 investment
advisers registered with us.\140\ We estimate that advisers will spend
between 50 to 500 hours to initially adopt and implement a business
continuity and transition plan depending on the nature of an adviser's
current business continuity plan and the complexity of its operations.
This range is comprised of our estimates that a representative smaller
adviser (defined in this PRA as advisers with less than $100 million in
assets under management) would spend 50 hours on this initial effort at
a cost of $12,515,\141\ a representative mid-sized adviser (defined in
this PRA as advisers with at least $100 million in assets under
management but less than $1 billion) would spend 250 hours on this
initial effort at a cost of $70,045,\142\ and a representative larger
adviser (defined in this PRA as advisers with at least $1 billion in
assets under management) would spend 500 hours on this initial effort
at a cost of $147,310.\143\ As discussed in section II, exact costs for
any given adviser would depend on the facts and circumstances of the
adviser's operations and the comprehensiveness of its existing plan.
Aggregating the estimates above for all advisers, however, yields a
total industry-wide initial hourly burden of 3,404,600 \144\ (as
monetized, is equivalent to a one-time aggregate burden of
approximately $974.6 million).\145\ Amortized over a three-year period,
this would be an annual hourly burden of 95 per adviser\146\ (as
monetized, is equivalent to an annual amortized burden per adviser of
$27,172).\147\
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    \140\ This is the number of investment advisers registered with
us on our IARD System as of January 4, 2016.
    \141\ This estimate is based on the following calculations: 25
hours x $288 (hourly rate for a compliance manager) = $7,200; 20
hours x $127 (hourly rate for an operations specialist) = $2,540; 5
hours x $555 (hourly rate for a deputy general counsel) = $2,775.
$7,200 + $2,540 + 2,775 = $12,515. The hourly wages used are from
SIFMA's Management & Professional Earnings in the Securities
Industry 2013, modified to account for an 1800-hour work-year and
inflation (as of January 2016) and multiplied by 5.35 to account for
bonuses, firm size, employee benefits, and overhead.
    \142\ This estimate is based on the following calculations: 75
hours x $288 (hourly rate for a compliance manager) = $21,600; 60
hours x $127 (hourly rate for an operations specialist) = $7,620; 15
hours x $555 (hourly rate for a deputy general counsel) = $8,325; 50
hours x $264 (hourly rate for a senior systems analyst) = $13,200;
50 hours x $386 (hourly rate for an attorney) = $19,300. $21,600 +
$7,620 + $8,325 + $13,200 + $19,300 = $70,045. The hourly wages used
are from SIFMA's Management & Professional Earnings in the
Securities Industry 2013, modified to account for an 1800-hour work-
year and inflation (as of January 2016) and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead.
    \143\ This estimate is based on the following calculations: 100
hours x $288 (hourly rate for a compliance manager) = $28,800; 80
hours x $127 (hourly rate for an operations specialist) = $10,160;
20 hours x $555 (hourly rate for a deputy general counsel) =
$11,100; 65 hours x $264 (hourly rate for a senior systems analyst)
= $17,160; 65 hours x $386 (hourly rate for an attorney) = $25,090;
30 hours x $410 (hourly rate for a computer operations department
manager) = $12,300; 30 hours x $271 (hourly rate for a financial
reporting manager) = $8,130; 40 hours x $340 (hourly rate for a
senior operations manager) = $13,600; 30 hours x $255 (hourly rate
for a senior business analyst) = $7,650; 40 hours x $333 (hourly
rate for a senior risk management specialist) = $13,320. $28,800 +
$10,160 + $11,100 + $17,160 + $25,090 + $12,300 + $8,130 + $13,600 +
$7,650 + $13,320 = $147,310. The hourly wages used are from SIFMA's
Management & Professional Earnings in the Securities Industry 2013,
modified to account for an 1800-hour work-year and inflation (as of
January 2016) and multiplied by 5.35 to account for bonuses, firm
size, employee benefits, and overhead.
    \144\ This estimate is based on the following calculations:
(2,032 smaller advisers x 50 hours) + (6,636 mid-sized advisers x
250 hours) + (3,288 larger advisers x 500 hours) = 3,404,600 hours.
    \145\ This estimate is based on the following calculation:
(2,032 smaller advisers x $12,515) + (6,636 mid-sized advisers x
$70,045) + (3,288 larger advisers x $147,310) = $974.6 million.
    \146\ This estimate is based on the following calculations:
3,404,600 hours/3 years = 1,134,867 hours per year. 1,134,867 hours/
11,956 advisers = 95 hours per year per adviser.
    \147\ This estimate is based on the following calculations:
$974.6 million/3 years = $324.87 million per year. $324.87 million/
11,956 advisers = $27,172 per year per adviser.
---------------------------------------------------------------------------

    We also anticipate that some advisers may consult with outside
legal counsel and/or other outside professionals to assist in drafting
policies and procedures and/or to assist in evaluating particular
components of a plan. We estimate that the costs associated with such
an engagement would include fees for approximately 10 hours for smaller
firms, 30 hours for a mid-sized firm, and 50 hours for a larger firm,
at an average rate of $400 per hour (estimated hourly rate for outside
legal services).\148\ Consequently, for a smaller firm we estimate a
total of $4,000 in outside fees

for each smaller firm,\149\ $12,000 for each medium firm,\150\ and
$20,000 for each larger firm.\151\ Aggregating these estimates for all
advisers, yields a total industry wide initial cost burden of $153.5
million attributable to engaging outside legal services for assistance
in initially drafting and implementing the BCP.\152\ Amortized over a
three-year period, this would be an initial annual cost burden per
adviser of $4,282.\153\
---------------------------------------------------------------------------

    \148\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis we estimate that
such costs would be similar to the costs of outside legal services.
    \149\ This estimate is based on the following calculation: 10
hours x $400 = $4,000.
    \150\ This estimate is based on the following calculation: 30
hours x $400 = $12,000.
    \151\ This estimate is based on the following calculation: 50
hours x $400 = $20,000.
    \152\ This estimate is based on the following calculation:
($4,000 per smaller adviser x 2,032 smaller advisers) + ($12,000 per
mid-sized adviser x 6,636 mid-sized advisers) + ($20,000 per larger
adviser x 3,288 larger advisers) = $153.5 million.
    \153\ This estimate is based on the following calculations:
$153.5 million/3 years = $51.2 million per year. $51.2 million/
11,956 advisers = $4,282 per adviser.
---------------------------------------------------------------------------

    In addition to the initial burden, an adviser would incur ongoing,
annual costs associated with its business continuity and transition
plan, including the adviser annually reviewing the adequacy of its
business continuity and transition plan and the effectiveness of its
implementation. Based on staff experience, we estimate these ongoing
costs would total approximately 25% of an adviser's initial costs.
Accordingly, we estimate that a representative smaller adviser would
spend 12.5 hours annually on this effort internally (as monetized, is
equivalent to an annual burden of $3,129) while incurring outside costs
of $1,000,\154\ a representative mid-sized adviser would spend 62.5
hours annually on this effort internally (as monetized, is equivalent
to an annual burden of $17,511) while incurring outside costs of
$3,000,\155\ and a representative larger adviser would spend 125 hours
annually on this effort internally (as monetized, is equivalent to an
annual burden of $36,828) while incurring outside costs of $5,000.\156\
Aggregating the estimates above for all advisers yields a total
industry-wide ongoing annual burden of approximately 851,150 hours (as
monetized, is equivalent to an annual burden of $243.65 million) \157\
plus outside costs of $38.4 million.\158\ This translates to an annual
burden per adviser of 71.2 hours (as monetized, is equivalent to an
annual burden of $20,379) and $3,212.\159\
---------------------------------------------------------------------------

    \154\ This estimate is based on the following calculations: 0.25
x 50 hours = 12.5 hours. 0.25 x $12,515 = $3,129. 0.25 x $4,000 =
$1,000.
    \155\ This estimate is based on the following calculations: 0.25
x 250 hours = 62.5 hours. 0.25 x $70,045 = $17,511. 0.25 x $12,000 =
$3,000.
    \156\ This estimate is based on the following calculations: 0.25
x 500 hours = 125 hours. 0.25 x $147,310 = $36,828. 0.25 x $20,000 =
$5,000.
    \157\ This estimate is based on the following calculations:
(2,032 smaller advisers x 12.5 hours) + (6,636 mid-sized advisers x
62.5 hours) + (3,288 larger advisers x 125 hours) = 851,150 hours.
(2,032 smaller advisers x $3,129) + (6,636 mid-sized advisers x
$17,511) + (3,288 larger advisers x $36,828) = $243.65 million.
    \158\ This estimate is based on the following calculation:
(2,032 smaller advisers x $1,000) + (6,636 mid-sized advisers x
$3,000) + (3,288 larger advisers x $5,000) = $38.4 million.
    \159\ This estimate is based on the following calculations:
851,150 hours/11,956 advisers = 71.2 hours per adviser. $243.65
million/11,956 advisers = $20,379 per adviser. $38.4 million/11,956
advisers = $3,212 per adviser.
---------------------------------------------------------------------------

2. Rule 204-2
    The currently-approved total annual burden estimate for rule 204-2
is 1,986,152 hours. This burden estimate was based on estimates that
10,946 advisers were subject to the rule, and each of these advisers
spends an average of 181.45 hours preparing and preserving records in
accordance with the rule. Based on updated data as of January 4, 2016,
there are 11,956 registered investment advisers.\160\ This increase in
the number of registered investment advisers increases the total burden
hours of current rule 204-2 from 1,986,152 to 2,169,417, an increase of
183,265 hours.\161\
---------------------------------------------------------------------------

    \160\ See supra note 140 and accompanying text.
    \161\ This estimate is based on the following calculations:
(11,956 advisers - 10,946 advisers) * 181.45 hours = 183,265 hours;
183,265 hours + 1,986,152 hours = 2,169,417 hours.
---------------------------------------------------------------------------

    The proposed amendments to rule 204-2 would require a registered
investment adviser to maintain copies of the written business
continuity and transition plans drafted under proposed rule 206(4)-4.
In addition, the proposed amendments would require a registered
investment adviser to retain copies of any records documenting the
adviser's annual review of its policies and procedures under proposed
rule 206(4)-4.
    Based on staff experience, we estimate that the proposed amendments
to rule 204-2 would increase each registered investment adviser's
average annual collection burden under rule 204-2 by 2 hours, from
181.45 hours to 183.45 hours,\162\ and would thus increase the annual
aggregate burden for rule 204-2 by 23,912 hours,\163\ from 2,169,417
hours to 2,193,328 hours.\164\ As monetized, the estimated burden for
each registered investment adviser's average annual burden under rule
204-2 would increase by approximately $150,\165\ which would increase
the estimated monetized aggregate annual burden for rule 204-2 by
$1,793,325, from $162,706,275 to $164,499,600.\166\ We estimate that
there are no external costs associated with this collection of
information under the proposed amendments to rule 204-2.
---------------------------------------------------------------------------

    \162\ This estimate is based on the following calculation:
181.45 existing hours + 2 new hours = 183.45 hours.
    \163\ This estimate is based on the following calculation:
11,956 advisers x 2 hours = 23,912 hours.
    \164\ This estimate is based on the following calculation:
11,956 advisers x 183.45 hours = 2,193,328 hours.
    \165\ This estimate is based on the following calculation: 2
hours x $75 (hourly rate for an administrative assistant) = $150.
The hourly wage used is from SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified to account for an
1800-hour work-year and inflation (as of January 2016) and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
    \166\ This estimate is based on the following calculations:
2,169,417 hours x $75 = $162,706,275. 2,193,328 hours x $75 =
$164,499,600. $164,499,600-$162,706,275 = $1,793,325.
---------------------------------------------------------------------------

B. Request for Comment

    We request comment on whether our estimates for burden hours and
any external costs as described above are reasonable. Pursuant to 44
U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (1)
Evaluate whether the proposed collections of information are necessary
for the proper performance of the function of the Commission, including
whether the information will have practical utility; (2) evaluate the
accuracy of the Commission's estimate of the burden of the proposed
collections of information; (3) determine whether there are ways to
enhance the quality, utility, and clarity of the information to be
collected; and (4) determine whether there are ways to minimize the
burden of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
    The agency has submitted the proposed collection of information to
OMB for approval. Persons wishing to submit comments on the collection
of information requirements of the proposed amendments should direct
them to the Office of Management and Budget, Attention Desk Officer for
the Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Washington, DC 20503, and should send a copy to
Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F
Street NE., Washington, DC 20549-1090, with reference to File No. S7-
13-16. OMB is required to make a decision concerning the collections of
information between 30 and 60 days after publication of this release;
therefore, a comment to OMB is

best assured of having its full effect if OMB receives it within 30
days after publication of this release. Requests for materials
submitted to OMB by the Commission with regard to these collections of
information should be in writing, refer to File No. S7-13-16, and be
submitted to the Securities and Exchange Commission, Office of FOIA
Services, 100 F Street NE., Washington, DC 20549-2736.

IV. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory
Flexibility Analysis (``IRFA'') in accordance with section 3(a) of the
Regulatory Flexibility Act \167\ regarding our proposed rule 206(4)-4
and proposed amendments to rule 204-2.
---------------------------------------------------------------------------

    \167\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons for and Objectives of the Proposed Actions

    Based on staff observations, we are concerned about the adequacy of
some advisers' plans to address operational and other risks associated
with business resiliency. Establishing strong operational controls that
manage these risks, including the risks associated with business
continuity and transition, are important practices and should increase
the likelihood that advisers are as prepared as possible to continue
operations on an ongoing basis and to meet client expectations and
legal obligations in the event of a significant disruption in their
operations. Accordingly, proposed rule 206(4)-4 would require SEC-
registered advisers to adopt and implement written business continuity
and transition plans reasonably designed to address operational and
other risks related to a significant disruption in the investment
adviser's operations.
    We also are proposing specific components be included in such plans
in order to address certain disparate practices the staff has
previously observed during examinations and to facilitate robust
business continuity and transition planning across all SEC-registered
advisers. In addition, the proposed rule would require advisers to
review their business continuity and transition plans at least annually
in order to ensure that advisers are examining the continued adequacy
and effectiveness of their plans on an ongoing basis.
    The proposed amendments to rule 204-2 would require advisers to
make and keep all business continuity and transition plans that are in
effect or were in effect at any time within the past five years. The
proposed amendments would help advisers have easy access to necessary
information during periods of stress.

B. Legal Basis

    Proposed rule 206(4)-4 is designed to address certain disparate
practices our staff has previously observed during its examinations and
to facilitate robust business continuity and transition planning across
all SEC-registered advisers.
    The Commission is proposing new rule 206(4)-4 and amendments to
rule 204-2 under the rulemaking authority set forth in sections 204,
206(4) and 211(a) of the Advisers Act [15 U.S.C. 80b-4(b), 80b-6(4),
and 80b-11(a)].

C. Small Entities Subject to the Rule and Rule Amendments

    In developing these proposals, we have considered their potential
impact on small entities that would be subject to proposed new rule
206(4)-4 and the proposed amendments to rule 204-2. The proposed new
rule and the proposed amendments would affect all advisers registered
with the Commission, including certain small entities. Under Commission
rules, for the purposes of the Advisers Act and the Regulatory
Flexibility Act, an investment adviser generally is a small entity if
it: (1) Has assets under management having a total value of less than
$25 million; (2) did not have total assets of $5 million or more on the
last day of the most recent fiscal year; and (3) does not control, is
not controlled by, and is not under common control with another
investment adviser that has assets under management of $25 million or
more, or any person (other than a natural person) that had total assets
of $5 million or more on the last day of its most recent fiscal
year.\168\
---------------------------------------------------------------------------

    \168\ Rule 0-7(a) under the Advisers Act.
---------------------------------------------------------------------------

    The proposed new rule and the proposed amendments would not apply
to most advisers that are small entities (``small advisers'') because
small advisers are generally registered with one or more state
securities authorities instead of with the Commission.\169\ Based on
IARD data, however, we estimate that as of January 4, 2016,
approximately 515 small advisers are registered with the
Commission.\170\ Because these small advisers are registered, they,
like all SEC-registered investment advisers, would all be subject to
proposed new rule 206(4)-4 and the proposed amendments to rule 204-2.
---------------------------------------------------------------------------

    \169\ See section 203A of the Advisers Act, prohibiting most
small advisers from registering with the Commission.
    \170\ Based on SEC-registered investment adviser responses to
Form ADV, Item 5.F and Item 12.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    Proposed new rule 206(4)-4 and the proposed amendments to rule 204-
2 would impose certain recordkeeping and other compliance requirements
on all Commission-registered advisers, including Commission-registered
small advisers. Proposed rule 206(4)-4 would require advisers to adopt
and implement written business continuity and transition plans
reasonably designed to address operational and other risks related to a
significant disruption in the investment adviser's operations. The
proposed amendments to rule 204-2 would require advisers to make and
keep all business continuity and transition plans that are in effect or
were in effect at any time within the past five years.
1. Rule 206(4)-4
    As discussed in section II, we estimated that each adviser would
incur one-time costs to adopt and implement a written business
continuity and transition plan, as well as ongoing plan-related costs.
As noted above, there are currently approximately 515 small advisers
registered with the Commission. We estimate that each small adviser
would incur an average initial burden of 50 hours associated with
adopting and implementing a written business continuity and transition
plan at a cost of $12,515.\171\ Aggregating the estimated burden for
all small advisers yields a total initial hourly burden of 25,750 \172\
(as monetized, is equivalent to a one-time aggregate burden of
approximately $6,445,225).\173\ Amortized over a three-year period,
this would be an annual hourly burden of 16.7 per small adviser \174\
(as monetized, is equivalent to an annual amortized burden per small
adviser of $4,172).\175\
---------------------------------------------------------------------------

    \171\ See supra note 141 (discussing the estimated initial cost
burden associated with a representative smaller adviser).
    \172\ This estimate is based on the following calculation: 515
small advisers x 50 hours = 25,750 hours.
    \173\ This estimate is based on the following calculation: 515
small advisers x $12,515 = $6,445,225.
    \174\ This estimate is based on the following calculation: 50
hours/3 years = 16.7 hours per year.
    \175\ This estimate is based on the following calculations:
$12,515/3 years = $4,172 per year.
---------------------------------------------------------------------------

    Our staff also anticipates that some small advisers may consult
with outside legal counsel and/or other outside professionals to assist
in drafting policies and procedures and/or to provide assistance in
evaluating

particular components of a plan. We estimate that the costs associated
with such an engagement would include fees for approximately 10 hours
for small firms at a rate of $400 per hour.\176\ Consequently, for a
representative smaller firm we estimate a total of $4,000 in outside
fees.\177\ Amortized over a three-year period, this would be an annual
burden per small adviser of $1,333.\178\ Accordingly, we estimate that
the total annual initial burden on 515 small advisers for adopting and
implementing a written business continuity and transition plan would be
$686,495.\179\
---------------------------------------------------------------------------

    \176\ See supra note 148 and accompanying text.
    \177\ This estimate is based on the following calculation: 10
hours x $400 per hour = $4,000.
    \178\ This estimate is based on the following calculation:
$4,000/3 years = $1,333 per year.
    \179\ This estimate is based on the following calculations: 515
small advisers x $1,333 = $686,495.
---------------------------------------------------------------------------

    In addition to the initial burden, a small adviser would incur
ongoing, annual costs associated with its business continuity and
transition plan, including the adviser annually reviewing the adequacy
of its business continuity plan and the effectiveness of its
implementation. Based on staff experience, we estimate that these
ongoing costs would total approximately 25% of a small adviser's
initial costs. Accordingly, we estimate that each small adviser would
spend 12.5 hours annually on this effort internally while incurring
outside costs of $1,000.\180\ Aggregating the estimates above for 515
small advisers yields a total ongoing annual burden on small advisers
of approximately 6,438 hours \181\ plus outside costs of $515,000.\182\
---------------------------------------------------------------------------

    \180\ This estimate is based on the following calculations: 0.25
x 50 hours = 12.5 hours. 0.25 x $4,000 = $1,000.
    \181\ This estimate is based on the following calculation: 12.5
hours x 515 advisers = 6,438 hours.
    \182\ This estimate is based on the following calculation:
$1,000 x 515 advisers--$515,000.
---------------------------------------------------------------------------

2. Rule 204-2
    The currently-approved annual aggregate information collection
burden under rule 204-2 is 1,986,152 hours. This approved annual
aggregate burden was based on estimates that 10,946 advisers were
subject to the rule, of which 478 were small advisers, and each of
these advisers spends an average of 181.45 hours preparing and
preserving records in accordance with the rule. Based upon updated data
as of January 4, 2016, there are 11,956 registered investment
advisers,\183\ of which 515 are small advisers.\184\ The increase in
the number of registered small advisers increases the total burden
hours of current rule 204-2 on small advisers from 86,733 hours to
93,447 hours, an increase of 6,714 hours.\185\
---------------------------------------------------------------------------

    \183\ See supra note 140 and accompanying text.
    \184\ See supra note 170 and accompanying text.
    \185\ This estimate is based on the following calculations: 515
small advisers x 181.45 hours = 93,447 hours. 478 small advisers x
181.45 hours = 86,733 hours. 93,447 - 86,733 = 6,714.
---------------------------------------------------------------------------

    The proposed amendments to rule 204-2 would require a registered
investment adviser to maintain copies of the written business
continuity and transition plans drafted under proposed rule 206(4)-4.
In addition, the proposed amendments would require a registered
investment adviser to retain copies of any records documenting the
adviser's annual review of its policies and procedures under proposed
rule 206(4)-4.
    Based on staff experience, we estimate that the proposed amendments
to rule 204-2 would increase each registered investment adviser's
average annual collection burden under rule 204-2 by 2 hours, from
181.45 hours to 183.45 hours,\186\ and would thus increase the annual
aggregate burden for rule 204-2 by 1,030 hours,\187\ from 93,447 hours
to 94,477 hours.\188\ As monetized, the estimated burden for each
registered investment adviser's average annual burden under rule 204-2
would increase by approximately $150,\189\ which would increase the
estimated monetized aggregate annual burden for rule 204-2 by $77,250,
from $7,008,525 to $7,085,775.\190\ We estimate that there are no
external costs associated with this collection of information under the
proposed amendments to rule 204-2.
---------------------------------------------------------------------------

    \186\ This estimate is based on the following calculation:
181.45 existing hours + 2 new hours = 183.45 hours.
    \187\ This estimate is based on the following calculation: 515
small advisers x 2 hours = 1,030 hours.
    \188\ This estimate is based on the following calculation: 515
small advisers x 183.45 hours = 94,477 hours.
    \189\ This estimate is based on the following calculation: 2
hours x $75 (hourly rate for an administrative assistant) = $150.
The hourly wage used is from SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified to account for an
1800-hour work-year and inflation (as of January 2016) and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead.
    \190\ This estimate is based on the following calculations:
93,447 hours x $75 = $7,008,525. 94,477 hours x $75 = $7,085,775.
$7,085,775 - $7,008,525 = $77,250.
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    We believe there are no federal rules that duplicate, overlap, or
conflict with proposed new rule 206(4)-4 and the proposed amendments to
rule 204-2. The written business continuity and transition plans that
would be required by the proposed new rule would include certain
policies and procedures already generally required by other rules under
the federal securities laws, but the proposed new rule would not
require these policies and procedures to be duplicated. Some of the
records an adviser would be required to maintain under the proposed
amendments to rule 204-2 also may be required records under the general
recordkeeping provisions of rule 204-2 of the Advisers Act, but such
overlap would be limited and the Commission would not require the
adviser to maintain duplicate copies.

F. Significant Alternatives

    In formulating our proposal, we have considered various reasonable
alternatives to the individual elements of proposed new rule 206(4)-4
and the proposed amendments to rule 204-2, specifically as they relate
to accomplishing our stated objectives while minimizing any significant
economic impact on small entities. The alternatives most relevant to
small advisers are discussed below. We have also requested comment
relating to certain specific aspects of these and other alternatives
above.\191\
---------------------------------------------------------------------------

    \191\ See supra section I.C.1.f.
---------------------------------------------------------------------------

    The Commission considered exempting small advisers from the
proposal entirely. The Commission also considered setting forth
different business continuity and transition plan requirements for
small advisers. However, because small advisers generally face the same
types of transition and business continuity issues as larger advisers,
although on a smaller scale, we believe small advisers should be
subject to the proposed rule to the same extent as larger advisers and
be allowed to tailor their business continuity and transition plans to
the scope of their business. The proposed rule allows each adviser the
necessary flexibility in creating a business continuity and transition
plan to take into account the adviser's own unique operations, the
nature and complexity of its business, its clients, and its key
personnel, and we believe that such flexibility may result in small
advisers incurring less costs to comply.\192\
---------------------------------------------------------------------------

    \192\ See supra section III.A.1, discussing the lower estimated
cost burdens, both initial and ongoing, associated with smaller
advisers as compared to larger advisers.
---------------------------------------------------------------------------

G. Solicitation of Comments

    We encourage written comments on matters discussed in this IRFA. We
solicit comment on the number of small entities subject to the proposed
rule and

whether the proposed rule discussed in this release could have an
effect on small entities that has not been considered. We request that
commenters describe the nature of any impact on small entities and
provide empirical data to support the extent of such impact.

V. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \193\ we must advise OMB whether a proposed
regulation constitutes a ``major'' rule. Under SBREFA, a rule is
considered ``major'' where, if adopted, it results in or is likely to
result in (1) an annual effect on the economy of $100 million or more;
(2) a major increase in costs or prices for consumers or individual
industries; or (3) significant adverse effects on competition,
investment or innovation.
---------------------------------------------------------------------------

    \193\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    We request comment on the potential impact of the proposed rule on
the economy on an annual basis. Commenters are requested to provide
empirical data and other factual support for their views to the extent
possible.

VI. Statutory Authority

    The Commission is proposing new rule 206(4)-4 and amendments to
rule 204-2 under the rulemaking authority set forth in sections 204,
206(4) and 211(a) of the Advisers Act [15 U.S.C. 80b-4, 80b-6(4), and
80b-11(a)].

List of Subjects in 17 CFR Part 275

    Investment advisers, Reporting and recordkeeping requirements.

Text of Proposed Rule Amendments

    For reasons set out in the preamble, title 17, chapter II of the
Code of Federal Regulations is proposed to be amended as follows:

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
1. The authority citation for part 275 continues to read, in part, as
follows:

    Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, and 80b-11, unless
otherwise noted.
* * * * *
    Section 275.204-2 is also issued under 15 U.S.C. 80b-6.
* * * * *
0
2. Section 275.204-2 is amended by:
0
a. Reserving paragraph (a)(19);
0
b. Adding paragraph (a)(20); and
0
c. Revising paragraph (e)(1).
    The addition and revision read as follows:

Sec.  275.204-2  Books and records to be maintained by investment
advisers.

    (a) * * *
    (20)(i) A copy of the investment adviser's business continuity and
transition plan formulated pursuant to Sec.  275.206(4)-4 that is in
effect, or at any time within the past five years was in effect;
    (ii) Any records documenting the investment adviser's annual review
of the business continuity and transition plan conducted pursuant to
Sec.  275.206(4)-4(b).
* * * * *
    (e)(1) All books and records required to be made under the
provisions of paragraphs (a) through (c)(1)(i), and (c)(2) of this
section (except for books and records required to be made under the
provisions of paragraphs (a)(11), (a)(12)(i), (a)(12)(iii),
(a)(13)(ii), (a)(13)(iii), (a)(16), (a)(17)(i), and (a)(20)(i) of this
section), shall be maintained and preserved in an easily accessible
place for a period of not less than five years, from the end of the
fiscal year during which the last entry was made on such record, the
first two years in an appropriate office of the investment adviser.
* * * * *
0
3. Section 275.206(4)-4 is added to read as follows:

Sec.  275.206(4)-4  Investment adviser business continuity and
transition plan.

    (a) Prohibition. If you are an investment adviser registered or
required to be registered under section 203 of the Act (15 U.S.C. 80b-
3), it shall be unlawful within the meaning of section 206 of the Act
(15. U.S.C. 80b-6) for you to provide investment advice to your clients
unless you:
    (1) Business continuity and transition plan. Adopt and implement a
written business continuity and transition plan; and
    (2) Annual review. Review, no less frequently than annually, the
adequacy of the business continuity and transition plan and the
effectiveness of its implementation.
    (b) Content of business continuity and transition plan. (1) For
purposes of this section, the term business continuity and transition
plan means policies and procedures reasonably designed to address
operational and other risks related to a significant disruption in the
investment adviser's operations, including policies and procedures
concerning:
    (i) Business continuity after a significant business disruption;
and
    (ii) Business transition in the event the investment adviser is
unable to continue providing investment advisory services to clients.
    (2) The content of a business continuity and transition plan shall
be based upon risks associated with the adviser's operations and shall
include policies and procedures designed to minimize material service
disruptions, including policies and procedures that address the
following:
    (i) Maintenance of critical operations and systems, and the
protection, backup, and recovery of data, including client records;
    (ii) Pre-arranged alternate physical location(s) of the adviser's
office(s) and/or employees;
    (iii) Communications with clients, employees, service providers,
and regulators;
    (iv) Identification and assessment of third-party services critical
to the operation of the adviser; and
    (v) Plan of transition that accounts for the possible winding down
of the investment adviser's business or the transition of the
investment adviser's business to others in the event the investment
adviser is unable to continue providing investment advisory services,
that includes the following:
    (A) Policies and procedures intended to safeguard, transfer, and/or
distribute client assets during transition;
    (B) Policies and procedures facilitating the prompt generation of
any client-specific information necessary to transition each client
account;
    (C) Information regarding the corporate governance structure of the
adviser;
    (D) Identification of any material financial resources available to
the adviser; and
    (E) An assessment of the applicable law and contractual obligations
governing the adviser and its clients, including pooled investment
vehicles, implicated by the adviser's transition.

    By the Commission.

    Dated: June 28, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-15675 Filed 7-1-16; 8:45 am]
 BILLING CODE 8011-01-P