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SEC proposes stricter requirements for outsourcing by RIAs

On Behalf of | Nov 4, 2022 | Regulatory Investigations

The Securities and Exchange Commission is proposing measures aimed at tightening the requirements for registered investment advisors who use third-party service providers, AdvisorHub reports.

The SEC’s proposed new rule and rule amendments would prohibit RIAs from outsourcing certain services and functions unless they perform a thorough due diligence process and monitor the vendors they use. Under the Investment Advisers Act of 1940, advisors would have to periodically monitor and reassess the performance of third-party providers to determine whether it is appropriate to continue to outsource those services or functions to them.

The SEC said that with the growth of the asset management industry, many RIAs are outsourcing various functions including providing investment guidelines, portfolio management, models related to investment advice, indexes, or trading services or software. The commission noted that clients could be significantly harmed when an advisor outsources a function or service without appropriate advisor oversight.

“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”, said SEC Chair Gary Gensler. “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”.

Under the proposal, advisors would have to obtain reasonable assurances that all third-party recordkeepers meet certain standards. The advisors would also be required 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 public comment period for the proposal will remain open for 60 days after the date of publication on or 30 days after the date of publication in the Federal Register, whichever period is longer.

The attorneys at Lewitas Hyman regularly monitor SEC, FINRA and other SRO rule-making activities to help ensure that our clients are aware of any new policies, while assisting them in implementing any recommended changes. Our clients include broker-dealers, RIAs, banks, investment companies and hedge funds, along with registered representatives and other individuals participating in the securities industry. If your firm is facing an investigation from a regulatory agency, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.