SEC’s proposed requirements draw attention to vendor due diligence

31 October 2022 | Americas | Articles

The SEC’s new rule 206(4)-11 proposal around the oversight of third-party vendors reinforces the need for firms to conduct robust due diligence on their service providers.

Published on October 26, 2022, the proposal prohibits registered investment advisors from outsourcing certain services or functions to service providers without meeting certain due diligence and oversight requirements.

Within the proposal, the SEC has set out key requirements advisors will need to meet, including:

• Conducting due diligence before outsourcing to the service provider, to subsequently monitor their performance and to periodically assess whether to retain them.
• Maintaining books and records related to due diligence and monitoring requirements.
• Disclosing amendments to the Form ADV to report census-type information about the service providers.
• Conducting due diligence and monitoring of all third-party recordkeepers to provide reasonable assurance that they will meet certain standards outlined in the proposed rule.

The new rule proposal also establishes an oversight framework that will apply to all SEC-registered investment advisors that outsource a “covered function.” The SEC explicitly defines a covered function as a function or service that:

• Is necessary to provide advisory services in Compliance with Federal securities law.
• If not performed, or performed negligently, will likely cause a material negative impact on the advisor’s clients or on the advisor’s ability to provide investment advisory services.

Now that the 60-day public comment period has begun, we will continue to monitor proposed rule 206(4)-11 and provide additional insight into the industry’s reaction as it moves through the rule-proposal process. If you are a registered investment advisor who currently outsources covered functions to third-party service providers, you should continue to evaluate the requirements outlined above against your current third-party oversight programs in preparation.

How we can support you

If you are looking to better understand how the new proposed rule impacts your firm, or would like to see how your current third-party oversight program stacks up to the proposed requirements, please reach out to us. We can assist by performing a health check on your current third-party oversight processes and evaluate or assist with the development of a risk-based third-party oversight program for your firm.