SEC Proposes New Oversight Requirements for Certain Services Outsourced by Investment Advisors
On October 26, 2022, the US Securities and Exchange Commission (SEC) proposed a new rule and rule amendments under the Investment Advisors Act that, if passed, would prohibit registered investment advisors from outsourcing certain services without conducting their own due diligence and monitoring of the service providers.
Covered services would include those services or functions that are necessary for providing advisory services in compliance with the federal securities law and, if performed or not performed negligently, would result in material negative impact to clients. Some examples include providing investment guidelines, portfolio management, models related to investment advices, indexes, or trading services.
The proposed rule would apply to certain covered functions. Most significantly, the rule would require advisors to implement the following changes:
- Satisfy specific due diligence elements before hiring a service provider that will perform certain advisory services or functions;
- Periodically monitor the performance of service providers performing certain advisory functions;
- Conduct due diligence and monitoring for all third-party record-keepers and get reasonable assurances that the record-keepers will meet certain standards; and
- Maintain records related to the proposed oversight obligations and report information about the service providers covered by the rule.
The proposed rule will remain available for public comment for 60 days after October 26, 2022, or 30 days after the date of the rule’s publication in the Federal Register, whichever is longer. We are closely watching changes in SEC regulations.
Please reach out to any member of the firm’s Corporate & Securities Group with questions on how to anticipate and timely meet obligations under the proposed rules.
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