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United States SEC Proposes New Monitoring Requirement for Services Outsourced By Asset Managers & Investment Advisors, Increased Risks to 60 Million Accounts & $100 Trillion AUM

27th October 2022 | Hong Kong

The United States Securities & Exchange Commission (SEC) has proposed new monitoring requirement for selected services (eg. portfolio management, compliance) outsourced by asset managers & investment advisors, potentially posing increased risks (although with benefits such as lower cost) to more than 60 million accounts & $100 trillion AUM (Assets under Management).  United States SEC: “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.  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.”   United States 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.”

“ United States SEC Proposes New Monitoring Requirement for Services Outsourced By Asset Managers & Investment Advisors, Increased Risks to 60 Million Accounts & $100 Trillion AUM “

 


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The Securities and Exchange Commission – 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.

 

United States SEC Announcement

New York Stock Exchange Trading Floor

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

26th October 2022 – The Securities and Exchange Commission today 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.

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.

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 SEC.gov 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 SEC.gov or 30 days after the date of publication in the Federal Register, whichever period is longer.




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