In a new move, on October 26th the Securities and Exchange Commission (SEC) proposed a new rule and rule amendments to prohibit investment advisers from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers.
At a time when compliance risks are more prevalent than they’ve ever been – and at a time when onboarding and screening potential partners and vendors holds more importance than ever – the SEC’s proposal is a timely one.
With combined assets under management of over $100 trillion in play, the increased use of third-party service providers by investment advisers has meant that the SEC has made several recommendations to ensure advisers who use them continue to meet their obligations to the investing public. As SEC chair Gary Gensler notes in the announcement of the proposal: “Today’s proposal specifies requirements for investment advisers designed to ensure that advisers’ outsourcing is consistent with their obligations to clients.”
So what impact could the proposal have? It 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.
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, while also requiring 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.
With the proposal now in its 60-day public comment period, investment advisers should take time to research and consider solutions that will aid them in their monitoring of third parties and service providers, including tools that allow them gain real-time visibility into third-party risk, assess and manage risk in a unified program and monitor relevant risk data in real time.