SEC proposed oversight requirements for RIA service providers

On Oct. 26, 2022, the Securities and Exchange Commission (SEC) proposed a new rule under the Investment Advisers Act of 1940 (Advisers Act) in relation to registered investment advisers (adviser) outsourcing certain services or functions. Included in the proposed rule were related amendments to the investment advisor registration form to collect census-type information about the service providers as well as related amendments to the Advisers Act books and records rule. The rule aims to reduce any harm to the investing public that can arise from an adviser outsourcing services without proper oversight.

The proposed rule would require advisers to:

• Conduct due diligence prior to engaging a service provider to perform “covered functions;”
• Periodically monitor the performance and reassess the retention of the service provider in accordance with due diligence requirements; and
• Make and/or keep books and records to conduct due diligence and monitoring of service providers.

Under the proposed rule, a covered function is a function or service that:

• Is necessary for the adviser to provide its investment advisory services in compliance with federal securities laws; and
• If not performed or performed negligently would be reasonably likely to cause a material negative impact on the adviser’s clients or the adviser’s ability to provide investment advisory services.

The SEC provided examples of potential covered function categories:

• Adviser/subadviser
• Client services
• Cybersecurity
• Investment guideline/restriction
• Compliance
• Investment risk
• Portfolio management (excluding adviser/subadviser)
• Portfolio accounting
• Pricing
• Reconciliation