SEC Proposal Calls for Vetting of Outsourced Services by Advisers

The SEC says the new rule proposals are responding to the growing trend in use of third-party vendors by financial advisers. An adviser association calls them ‘overly burdensome.’

The Securities and Exchange Commission (SEC) on Wednesday proposed new rules requiring that financial planning and wealth management advisers vet and monitor vendors they use to outsource a broad array of client-related services.

The SEC said that, while advisers have always used third-party services for their work, the increased use of outsourcing to lower the costs of business requires increased regulation.

“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,” SEC chair Gary Gensler said in a statement.

The rule comes amid continued growth in advisers’ using outsourcing in their everyday work with clients. About 32% of RIAs said they use outsourcing for services, up from 27% two years ago, according to a September survey of 550 advisers by a division of the Chicago-based Northern Trust.

The Investment Adviser Association (IAA), which represents financial advisers in Washington, called the new rules “overly burdensome” and said the SEC does not recognize “how little leverage firms have over many service providers.”

“The SEC again has not appropriately considered the cumulative impact of its wave of new proposals on advisory firms of all sizes, nor has it provided sufficient time for meaningful feedback on these sweeping changes,” Karen Barr, president and CEO of the IAA, said in an emailed statement.

The new rule broadly applies to what the SEC calls “covered functions,” or outsourced services that could cause a “material negative impact” on clients. The regulator also said it applies to services that are required for the adviser to provide to comply with Federal securities laws.

In a 232-page report, the SEC said the determination of what obligations should be given due diligence would depend on the “facts and circumstances.” It gave examples such as third-parties providing custom indexes, investment risk software or services, portfolio management or trading services or software, and investment advisory services.

“An adviser should be overseeing outsourced functions to ensure the adviser’s legal obligations are continuing to be met despite the adviser not performing those functions itself,” the SEC said.

There will be a public comment period on the proposal of at least 60 days, the SEC said.