Post-Sandy, SEC advocates disaster planning

GPs are being advised to give greater thought to how their operations would fare during a Category 3 hurricane. 

On Friday the US Securities and Exchange Commission, the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority issued a joint staff advisory on business continuity and disaster recovery planning. 

The advisory, sparked by the havoc Hurricane Sandy wreaked along the eastern seaboard in late October, asks GPs and other financial firms to consider a number of safety measures including the ability for employees to work remotely from home. 

“Most private equity firms have already given this great thought as a result of meeting LPs’ heightened expectations and from their own personal experiences,” said Bill Hupp, former chief financial officer of fund of funds Adams Street Partners. “The migration to cloud computing, and just the technology available today, has made it incredibly easy for employees to work remotely.”

“Every employee at the firm could work from home if need be, it’s something that’s regularly tested,” added Pam Hendrickson, chief operating officer of mid-market firm The Riverside Company, when asked about her firm's disaster planning.  “Our communication plan includes the ability to send broadcast emails and text messages to all employees.  We also provide each employee a wallet-sized card providing information on who to call to report their status for safety purposes.” 

A more difficult expectation for firms to meet is where they locate a back-up site used during emergencies. In the advisory, regulators recommend the back-up location to be far enough from headquarters so that a “region wide event” would not disrupt both sites. But asking employees to travel too far away from their homes and families during an emergency is a sensitive matter, wrote Doug Cornelius, chief compliance officer at real estate group Beacon Capital Partners, in a recent blog posting.

“Many (most?) employees are not going to abandon their families, stuck with limited access to power, food, and other needs.”

The recommendations however are not binding. “There’s no rule that specifically requires a SEC-registered firm to have a business continuity plan,” said Debevoise & Plimpton funds partner Ken Berman. “But the commission’s expectation is that firms would be in a position to, in the event of an emergency or natural disaster, continue to do business and protect the interest of their clients.” Firms that do not adequately plan for disasters may see the shortfall show up in a deficiency letter, Berman added. 

During planning, Hupp said a top priority for private equity managers is how they preserve communications with LPs during a disaster. “For example, can capital call notices still take place? Has the firm worked that out with the bank?”

Also recommended by Hupp is having a generator independent from the power grid provide juice to the firm’s back-up site. “Our off-site back-up service provider upgraded their offering a couple of years ago such that we didn't have to consider being on a different power grid. They went to on-site diesel powered generation which deals very effectively with any local power failures.” 

The joint staff review can be read in its entirety by clicking here.