SEC Proposes New Oversight Requirements for Certain Services Outsourced by Investment Advisers
The Securities and Exchange Commission (SEC) recently proposed a new rule and rule amendments under the Investment Advisers Act of 1940 to prohibit registered investment advisers from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers.
The proposal would require advisers to satisfy specific due diligence elements before retaining a service provider that will perform certain advisory services or functions and to subsequently carry out periodic monitoring of the service provider’s performance. The rule would apply to advisers that outsource certain “covered functions,” which include those services or functions necessary for providing advisory services in compliance with the federal securities laws and, if not performed or performed negligently, would result in material negative impact to clients.
Additionally, the proposal would require advisers to conduct due diligence and monitoring for all third-party recordkeepers and obtain reasonable assurances that the recordkeepers will meet certain standards. Finally, the proposal would require advisers to maintain books and records related to the new rule’s oversight obligations and to report census-type information about the service providers covered under the rule.
The proposal is published on SEC.gov and will be published in the Federal Register. The public comment period will remain open for 60 days after the date of issuance and publication on SEC.gov or 30 days after the date of publication in the Federal Register, whichever period is longer.