New Requirements for Outsourcing by Advisers: Proposed SEC Rule Brings More Obligations and Scrutiny
November 8, 2022
On October 26, 2022, the U.S. Securities and Exchange Commission proposed a new rule under the Investment Advisers Act of 1940 imposing due diligence, recordkeeping and reporting obligations on registered investment advisers who outsource certain key “covered functions” of the adviser’s business to third parties, including affiliates.
The Proposal represents another step toward more substantive regulation of RIAs by the SEC under Chairman Gensler, and will impose real costs and operational risk on RIAs.
The Proposal does not change the fact that advisers cannot—either currently or under the Proposal—“outsource” the fiduciary duties they owe to their clients. Indeed, two of the SEC’s commissioners pointed to this fact while dissenting from the proposal. They questioned the utility of the additional specific requirements for RIAs, and expressed their doubt as to whether adding these requirements would do anything to further the protection of advisers’ clients. Beyond that question of policy, the practical impacts resemble those of other rule proposals from this SEC—substantive requirements and disclosures that will help identify examination and investigation subjects for the SEC Staff and increase the stakes for advisers that engage in particular activities of concern to the Staff, in this case outsourcing.
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