SEC Proposes Oversight Guidelines for Investment Advisers

The SEC proposed a new rule, Outsourcing by Investment Advisers, that provides consistent oversight framework for investment advisers engaging third-party service providers under the Investment Advisers Act of 1940.

The proposal is meant to strengthen advisers’ responsibilities prior to engaging a service provider and reassess performance continuously to meet the fiduciary duty requirement of the act.

Who Is Affected?

The proposed rule would apply to all registered investment advisers and those required to register who outsource a covered function.

Functions or services necessary for the adviser to provide its investment advisory services are considered covered functions. Any function that, if not performed, could cause a material negative impact on the advisers’ clients or the advisers’ ability to provide investment advisory services, is covered.

The following functions are excluded:

  • Clerical
  • Ministerial
  • Utility
  • General office functions or services

The proposal would require investment advisers to reasonably determine and identify through due diligence that it would be appropriate to outsource the covered function and that the service provider selected is appropriate using the following criteria:

  • Nature and scope of the services
  • Potential risks and how they would be mitigated or managed
  • Competence, capacity, and resources of the service provider
  • Subcontracting arrangements related to the covered function
  • Coordination with the service provider for federal securities law compliance
  • The orderly termination of the provision of the covered function by the service provider

Requirements, Policies, and Procedures

While the rule doesn’t have explicit requirements, the SEC plans to rely on the existing rule 206(4)-7 that requires advisers to have policies and procedures to prevent violations of the act.

In addition, the proposed rule requires advisers monitor the service provider’s performance for compliance. The rule will also require investment advisers maintain a list of covered outsourced functions and how the adviser monitors performance of each service provider.

Finally, the proposed rule will amend Form ADV to provide transparency into covered services outsourced to third-party service providers.

We’re Here to Help

To learn more about how the proposed SEC rule could affect your company, contact your Moss Adams professional.

You can find additional resources at our Asset Management and Broker-Dealers Practices.

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