SEC Proposes Increased Advisor Oversight of Outsourced Functions
A proposed rule would apply to advisors who outsource functions that are necessary for providing advisory services in compliance with federal securities laws and that would have a material negative impact on clients if not performed or if performed negligently, the SEC said.
The Securities and Exchange Commission says it has proposed a new rule and rule amendments under the Investment Advisers Act of 1940 prohibiting registered investment advisors from using third-party service providers for certain functions without first conducting due diligence and then continuing to monitor them periodically.
The rule would apply to advisors who outsource functions that are necessary for providing advisory services in compliance with federal securities laws and that would have a material negative impact on clients if not performed or if performed negligently, the SEC said.
The functions include providing investment guidelines, portfolio management, investment-advice models, model indices, trading services, or software, the SEC said.
The rule would also require advisors to conduct due diligence and monitoring on third-party recordkeepers as well as maintain books and records related to the rule's obligations and report census-type information about the service providers the rule applies to, according to the SEC.
"Though investment advisors have used third-party service providers for decades, their increasing use has led staff to make several recommendations to ensure advisors that use them continue to meet their obligations to the investing public," SEC chair Gary Gensler said in a release accompanying the proposal's publication. "When an investment advisor outsources work to third parties, it may lower the advisor's costs, but it does not change an advisor's core obligations to its clients. Thus, today's proposal specifies requirements for investment advisors designed to ensure that advisors' outsourcing is consistent with their obligations to clients."
The proposal was published Wednesday on the SEC's website and will be published in the Federal Register, the SEC said. The proposal has a public comment period that will be open for 60 days after the date of issuance and publication on the SEC's website or 30 days after the date of publication in the Federal Register, whichever is longer, according to the SEC.