sec examinations

SEC Proposes New Oversight Requirements for Certain Services Outsourced by Investment Advisers

Oct. 26, 2022 — The SEC proposed a new rule and rule amendments under the Investment Advisers Act of 1940 to prohibit registered investment advisers from outsourcing certain services and functions without conducting due diligence and monitoring of the service providers.

“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 $100 trillion,” 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.”

As demand for the asset management industry has grown and clients’ needs have become more complex, many advisers have engaged third-party service providers to perform certain functions or services, many of which are necessary for an adviser to provide its advisory services in compliance with the Federal securities laws. These functions can include providing investment guidelines, portfolio management, models related to investment advice, indexes, or trading services or software. Outsourcing can benefit advisers and their clients, but clients could be significantly harmed when an adviser outsources a function or service without appropriate adviser oversight.

Due Diligence Required

The proposal would require advisers 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. The rule would apply to advisers that outsource certain “covered functions,” which include those services or functions that are necessary for providing advisory services in compliance with the Federal securities laws and that if not performed or performed negligently would result in material negative impact to clients.

Monitoring and Recordkeeping Required

Additionally, the proposal would require advisers to conduct due diligence and monitoring for all third-party recordkeepers and obtain reasonable assurances that the recordkeepers will meet certain standards. Finally, the proposal would require advisers to maintain books and records related to the new rule’s oversight obligations and to report census-type information about the service providers covered under the rule.

The proposal was published today on and will be published in the Federal Register. The public comment period will remain open for 60 days after the date of issuance and publication on or 30 days after the date of publication in the Federal Register, whichever period is longer.

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The attorneys at Sallah Astarita & Cox, LLC are former SEC Staff Attorneys and brokerage firm counsel, with over 100 years of collective experience. If you have received a subpoena from the SEC, a document request from FINRA, or have a dispute with a brokerage firm, call 212-509-6544 for a free consultation. The firm represents investors and financial professionals nationwide.

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.

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