SEC Considers New Rules for Service Providers Hired by Investment Advisers

SEC policy makers are considering a new service provider rule proposals for US registered investment advisers. Currently, 15,000 of such entities in the United States provide advice to 60 million account holders with $100 trillion in assets under management. These include pension funds, endowments, retail investors and accounts in other spaces of the US and global economies.

Registered under 1940’s Investment Advisers Act (the “IAA”), such investment advisers must comply with a number of obligations set forth therein. These include fiduciary duties to protect the investment public.

Investment advisers have a long record of engaging external service providers to perform certain functions on their behalf. When such outsourcing takes place, the adviser’s costs may be lowered. At the same time, the adviser’s core responsibilities to its clients, from a legal perspective, remain undiminished and unaffected by such decision.

The SEC has proposed new requirements for investment advisers to ensure that any advisers’ outsourcing is consistent with their client obligations under the IAA. They are:

– First, to conduct due diligence prior to outsourcing certain core advisory functions (covered functions)—as well as to periodically monitor third-party service providers’ performance;

– Second, to maintain books and records related to the oversight of third-party service providers;

– Third, to report census-type information about third-party service providers to the public and the SEC; and

– Fourth, to conduct due diligence and monitoring for third-party recordkeepers and obtain reasonable assurances that the third-party recordkeepers will meet certain standards.

Under the proposed rules, certain functions, which if discharged by a third party service provider, would be targeted to the extent not performed or performed in an unsatisfactory manner.

These functions might include providing investment guidelines, portfolio management, models related to investment advice, custom indexes, investment risk, trading services or trading software. Covered functions also may include advisers’ use of software as a service or artificial intelligence as a service, both of which are playing a growing role in the investor advisory space.

Do you have an investment advisory-related question or concern? As an investment advisor, are you trying to outsource any of the services you provide to external providers? If so, contact us to schedule an introductory consultation with Castle Garden Law.