The Securities and Exchange Commission (SEC) is proposing new rules that would prohibit registered investment advisers from outsourcing certain services and functions without conducting due diligence.
The SEC rule changes would require advisers to satisfy specific due diligence elements before retaining a service provider that will perform certain advisory services or functions. Also, the advisor would be subsequently required to monitor the service provider’s performance periodically.
The new rule would apply to advisers that outsource certain “covered functions,” which include those services or functions that are necessary to comply with Federal securities laws that, if not performed or performed negligently, would result in material negative impact to clients.
Further, it would require advisers to conduct due diligence and monitoring for all third-party recordkeepers and maintain books and records related to the new rule’s oversight obligations.
“Registered investment advisers — more than 15,000 of them in total — play a critical role in our economy, advising more than 60 million accounts with combined assets under management of over $100 trillion,” SEC Chair Gary Gensler said. “Though investment advisers have used third-party service providers for decades, their increasing use has led staff to make several recommendations to ensure advisers that use them continue to meet their obligations to the investing public. When an investment adviser outsources work to third parties, it may lower the adviser’s costs, but it does not change an adviser’s core obligations to its clients. Thus, today’s proposal specifies requirements for investment advisers designed to ensure that advisers’ outsourcing is consistent with their obligations to clients.”
The proposal was published Wednesday on SEC.gov and will be published in the Federal Register. The public comment period will remain open for 60 days after publication on the SEC website or 30 days after the date of publication in the Federal Register, whichever period is longer.