SEC Issues Proposed Rule on Outsourcing by Investment Advisers; Comments Due December 27

The Securities and Exchange Commission (SEC) has issued proposed rules to prohibit registered investment advisers from outsourcing certain services without conducting due diligence and monitoring of the service providers. Many advisers engage service providers to perform functions that can benefit advisers and their clients in a number of ways, such as providing investment guidelines, portfolio management, models related to investment advice, indexes, or trading services or software, according to the SEC fact sheet. 

New proposed rule 206(4)-11 would establish an oversight framework across SEC-registered advisers that outsource a “covered function.”; Covered function means that it is necessary to provide advisory services in compliance with the Federal securities laws, and if not performed or performed negligently, would be reasonably likely to cause a material negative impact on the adviser’s clients or on the adviser’s ability to provide investment advisory services. The proposed rule would exclude clergy, ministerial, utility, and general office functions or services.

The proposal would require an adviser who relies on a third-party recordkeeper to conduct due diligence and monitoring of that third party.