The Securities and Exchange Commission today proposed an extensive new rule that would keep registered investment advisors from outsourcing their services or functions unless they’ve done necessary due diligence, monitoring and record-keeping for the vendors they use.
The 232-page proposal would also require RIAs to determine whether their vendors have material sub-contracting arrangements and require advisors to mitigate and manage any possible risks to their clients.
The agency says any poor oversight of vendors could hurt clients financially, through either market losses, increased costs or lost opportunities. There is also the chance when services are outsourced that clients could be defrauded, misled or deceived, the SEC said in its proposal
The advisory industry has seen explosive growth, growing from $47 trillion in regulatory assets under management to $128 trillion in 10 years, the SEC said. That means advisors have been put upon to meet increasingly complex client demands in a cost-effective way, which they have done by turning more and more to vendors. These outside companies provide everything from portfolio management and back-office support to robo-advisor services and compliance.
While investors can benefit from such outsourcing, maybe in some cases getting a better quality of service and lower fees, there is a risk that clients could be significantly harmed when advisors use service providers without appropriate oversight, the agency added.
Not surprisingly, the new rule has detractors. Karen Barr, the president and CEO of the Investment Adviser Association, said the new regulations seem to be overkill for an industry already working overtime to implement numerous new regulations.
In an interview with Financial Advisor, Barr called the new rules for vendor oversight “overly burdensome and prescriptive,” and said they “fail to recognize how little leverage firms have over many service providers.”
The proposal is also not adequately tailored to the range of firms it covers, including smaller advisors, she said
“It is apparent that 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,” Barr said.