SEC

SEC Proposals for investment advisers

The SEC has released a proposal for amendments to the Investment Advisers Act, which suggests registered investment advisers in the US need to scrutinize third party service providers to protect clients’ interests.


The SEC proposal, which would fall under the Investment Advisers Act of 1940 would prohibit registered investment advisers from outsourcing certain services or functions without first meeting minimum requirements.


Advisers would be required to conduct due diligence prior to engaging a service provider to perform certain services or functions. They would then need to periodically monitor the performance and reassess the retention of the service provider to ascertain whether it was appropriate to continue to outsource those services or functions to that service provider. Books and records would need to be created and maintained to demonstrate compliance.
Under the proposed regulation, service providers could also be required to provide census-type information to the SEC.


Following EU regulations


The proposal follows a very similar structure to Luxembourg’s CSSF Circular 18 covering firms that are delegating investment activities. The Circular outlines the requirements for initial due diligence to demonstrate a sound selection process, then periodic due diligence and ongoing monitoring to ensure the delegate is adequately supervised and still meets the requirements.


Covered functions

Investment advisers outsource a lot of functions to third parties, and not all of these are considered by the SEC to be a risk to clients. Covered functions are those which are necessary for the adviser to provide its services in compliance with Federal law, or those which, if not performed, or performed inadequately would have a negative impact.
Examples of covered functions include providing investment guidelines, providing advice models, custom indexing, investment risk software or services, portfolio management or trading software or services, portfolio accounting services, providing investment subadvisory or advisory services, amongst others.

 

Record keeping

Under the proposals advisers should maintain records of the covered functions, with the name of the service provider they have been outsourced to, with details of why the adviser believes it should be classed as a covered function.


Due diligence

This should take place before a service provider is appointed, and should meet six key areas:


What - The nature and scope of the covered function that will be outsourced

Risks - How risks to clients will be mitigated and managed

Third Party Suitability - That the service provider has the right team, resources and tools in place to provide an effective service

Supply Chain - Investigate subcontracting arrangements the service provider may have in place for suitability

Service Provider Compliance – Ensure that the service provider can and will comply with the Federal securities laws

Orderly Termination – Ensure the service provider has a plan in place for the orderly termination of services as and when required

 

What can you do if the proposals are accepted?


Diligend can support registered investment advisers to perform effective due diligence and monitoring of service providers.

Diligend’s digital due diligence platform allows advisers to perform initial due diligence on service providers with ease, regardless of the scale of operations. The fully customizable platform allows the adviser to create any set of questions, to collect any data points required, adding alerts and flags to ensure risk warnings are clear and visible.

Advanced analytics mean it has never been easier to make sense of due diligence data, using custom dashboards that can be easily exported to any format.

Reporting is flexible and comprehensive, allowing own branding and personalization. Diligend also provides a full audit trail which meets even the most stringent compliance and regulatory requirements.

 

Get in touch with our team to find out how a platform like ours can reduce the impact of regulatory change like this.

Similar posts

Get notified on new marketing insights

Be the first to know about new B2B SaaS Marketing insights to build or refine your marketing function with the tools and knowledge of today’s industry.