On October 26, a sharply divided Securities and Exchange Commission (SEC) proposed a new rule governing outsourcing of certain services by investment advisers. Services covered by the proposed rule include:
- services necessary for an adviser to provide services in compliance with law; and
- services, if not performed or performed negligently, would likely impact the adviser's clients or the ability for the adviser to provide advisory services.
An adviser would be required:
- to conduct due diligence on the outsourced service provider and to update that due diligence periodically. Such due diligence would have to include (a) the scope of the outsourced services; (b) potential risks and mitigation of those risks; (c) the service provider's competence; (d) any subcontracting by the service provider; (e) the service provider's legal compliance efforts; and (f) plans for orderly termination of the arrangement;
- to keep records of the adviser's due diligence;
- to report information about outsourcing on the adviser's Form ADV; and
- for third-party record-keepers, in addition to the above due diligence, to obtain reasonable assurances the record-keepers will meet four standards: (a) certain record-keeping; (b) ensure records are kept in compliance with the record-keeping rules; (c) provide access to electronic records; and (d) ensure records are kept even if the record-keeper is fired by the investment adviser.
Commissioner Peirce published a dissent arguing that no need had been shown for the new rule, its costs would exceed any potential benefits, and the SEC lacks authority to adopt such a rule under a statutory grant of authority to adopt anti-fraud rules.
The comment period for the proposed rule will remain open until the later of (i) December 27, 2022; and (ii) 30 days after publication in the Federal Register. Read the SEC's proposing release.
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