The Securities and Exchange Commission today proposed new rules to prohibit registered investment advisers from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers. The proposal would apply to advisers that outsource certain “covered functions,” which include those services or functions that are necessary for providing advisory services in compliance with federal securities laws and that, if not performed or performed negligently, would result in harm to clients.
The proposal also 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, according to the SEC. Finally, it would require 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.
“Though investment advisers have used third-party service providers for decades, their increasing use has led staff to make several recommendations to ensure advisers that use them continue to meet their obligations to the investing public,” SEC Chairman Gary Gensler said. “When an investment adviser outsources work to third parties, it may lower the adviser’s costs, but it does not change an adviser’s core obligations to its clients.”