SEC Proposes New Rule Regarding Outsourcing for RIAs

Proposed Rule 206(4) -11: What investment advisers need to know

On October 26, 2022, the Securities and Exchange Commission (SEC) issued proposed rule 206(4) -11 regarding the use of third party service providers for Registered Investment Advisers (RIAs). The proposed rule is designed to prohibit RIAs from outsourcing covered functions (as defined by the proposed rule) to third party service providers without meeting certain minimum requirements. The proposed rule defines a covered function as a function or service that is necessary for the investment adviser to provide its services in compliance with the Federal securities laws and that, if not performed or if performed negligently, would be reasonably likely to cause a material negative impact on the adviser’s clients.

What are the proposed minimum requirements for RIAs?

• Due Diligence

The RIA would be expected to complete a reasonable level of due diligence on prospective service providers before outsourcing a covered function.

• Monitoring

The RIA should periodically monitor and assess the performance of an outsourced third party service provider.

• Books and Records

The RIA should keep books and records related to its diligence and monitoring process.

• Third Party Recordkeeping

The RIA should conduct diligence on, and monitor, third party recordkeepers and obtain reasonable assurance they will meet certain standards that will be acceptable to the RIA’s clients.

• Form ADV

The RIA should report outsourced third party service providers on Form ADV.

SEC Chair Gary Gensler commented, “When an investment adviser outsources work to third parties, it may lower the adviser’s costs, but it does not change an adviser’s core obligation to its clients. The proposed rule is designed to ensure that adviser’s outsourcing is consistent with their obligations to clients”

For more information on these proposed rules, please visit the official release on the SEC’s website.

Keiter’s Financial Services Industry team is closely monitoring these and other possible regulation changes. We will keep you updated so you can plan accordingly. If you have any questions, please reach out to your Keiter Opportunity Advisor or Email | Call: 804.747.0000