SEC Releases Rule Proposal on Third-Party Service Provider Oversight

In October, the SEC released a rule proposal that 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. Specifically, the proposal amends the Investment Adviser’s Act of 1940 to require SEC-registered advisers to perform due diligence to “reasonably determine” that the intended outsourcing is appropriate prior to retaining a service provider or third-party recordkeeper to perform a covered function or recordkeeping. Factors to consider, in part, include:

• Nature and scope of the function/service provided;
• Potential risk, including mitigation and management, of the function the service provider or third-party recordkeeper would provide;
• Competence, capacity, and resources necessary to perform the function; and,
• Coordination on federal securities law compliance.

The rule excludes clerical, ministerial, utility, and general office functions or services. The adviser must also perform periodic monitoring of the service providers performance, reassessment of the provider selected, and properly maintain books and records of the service provider’s performance. The public comment period will remain open for 60 days after October 26, 2022, or 30 days after publication in the Federal Register, whichever period is longer.

Click here to read the SEC’s proposed rule on third-party service provider outsourcing.
Click here to read a client alert on the proposed rule from Davis Polk.
Click here to read an SEC fact sheet covering the rule proposal