Industry Resistance to the SEC’s Proposed Outsourcing Rule

  

Industry Resistance to the SEC’s Proposed Outsourcing Rule

Back in October, the SEC proposed a new rule that would amend the Investment Advisers Act of 1940 to create due diligence and monitoring provisions for advisors that hire a third party that would provider a “covered function” to its clients. In developing the proposal the SEC has stated that purpose of the rule is to protect against potential investor harm if advisors don’t properly vet and monitor their service providers. The SEC has defined these covered functions as those that are essential to providing financial advice in compliance with federal security laws and that could materially harm clients if they were performed negligently or not at all. Over the years AdvisorAssist has communicated the importance of a prudent due diligence process when selecting service providers, while also delivering compliance testing and risk assessments to assist with your at least annual review of such vendors.

As one would imagine, the proposed rule resulted in industry push back. The public comment period for the proposed rule has since passed as of December 27th, but not after the SEC received approximately 90 letters. Industry groups such as the Investment Advisors Association, the Securities Industry and Financial Markets Association, the Institute for the Fiduciary Standard and the Money Management Institute pointed out that the proposal is unnecessary due to an advisor’s fiduciary duty to its clients, and that if approved the rule would do little to actually provide additional protection to investors. Many of the other comments spoke to the cost of complying with the rule if approved, especially in the case of smaller firms, as they would be duplicative to existing rules and regulations.

There were certain positive comments submitted as well. Investor advocates like the Public Investors Advocate Bar Association and the North American Securities Administrators Association, which represents state security regulators, feel the rule could go further, questioning the exemption for certain outsourced functions.

Time will tell whether the proposed rule will be approved as is, modified, or not pass at all. Rest assured AdvisorAssist will continue to monitor the situation and if ultimately approved, we will be working with you on the impact it will have on your firm and compliance program.

For additional information regarding the proposed rule and fact sheet please see the links below:

Proposed rule: Outsourcing by Investment Advisers

Fact Sheet: Outsourcing by Investment Advisers

Please contact your AdvisorAssist Consultant should you have any questions.

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