The Securities and Exchange Commission (SEC) has amended the Investment Adviser Act 1940 to prohibit US registered investment advisers (RIAs) from outsourcing certain services and functions without conducting due diligence and monitoring of the providers.
The watchdog said that RIAs are increasingly turning to third parties to perform certain functions or services “necessary for an adviser to provide its services in compliance with the federal securities law”.
These include investment guidelines, portfolio management, investment advice models, indexes, or trading services and software.
The stricter set of rules will apply to RIAs who outsource “covered functions”, which include services or functions that are necessary for providing financial advice that is compliant with federal securities laws to make sure there is not negative impact on clients.
Due diligence and monitoring will apply on all third-party recordkeeping businesses. The changes will also require advisers to record their newly introduced oversight obligations as they will need to report information about the providers as well.
“Registered investment advisers — more than 15,000 of them in total — play a critical role in our economy, advising more than 60 million accounts with combined assets under management of over $100trn (£88trn, €101trn),” said SEC chair Gary Gensler.
“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.
“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. Thus, today’s proposal specifies requirements for investment advisers designed to ensure that advisers’ outsourcing is consistent with their obligations to clients.”
