New SEC Plan Says RIAs Must Vet Third-Party Services

What You Need to Know

• The SEC's proposed due diligence requirements could cover services like portfolio management and trading software.

• The rule excludes services such as clerical, ministerial, utility and general office services.

• The Investment Adviser Association says the rule is overly burdensome, especially for small firms.

The Securities and Exchange Commission Wednesday proposed a new rule to prohibit registered investment advisors from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers.

“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,” SEC Chairman Gary Gensler said Wednesday during the open meeting.

“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,” he explained.

The proposal would require advisors to satisfy specific due diligence elements “before retaining a service provider that will perform certain advisory services or functions, and to subsequently carry out periodic monitoring of the service provider’s performance.” SOURCE