Executive Summary
In October 2022, the U.S. Securities and Exchange Commission published a proposed rule that, if adopted as proposed, will have significant impacts for registered investment advisers who engage in outsourcing.
The proposal would require registered investment advisers that want to outsource to:
- conduct due diligence prior to engaging a service provider to perform certain services or functions; and
- periodically monitor the performance and reassess the retention of the service provider in accordance with due diligence requirements to reasonably determine that it is appropriate to continue to outsource those services or functions to that service provider.
If you would like to read more about the requirements under this proposal, you can access our November 21, 2022 summary of the proposal.
Please contact James Delaney with any questions regarding this proposal.
Practical Implications
If these changes are adopted as proposed, registered investment advisers will have 10 months to:
- identify all of its covered functions (i.e., functions necessary for the adviser to perform its investment advisory services and which, if performed negligently, would be reasonably likely to a cause material negative impact on clients or on the adviser's ability to provide advisory services); and
- identify the relevant service providers;
- perform the required due diligence; and
- amend any service provider contracts that do not contain the types of monitoring and recordkeeping provisions required to comply with the rule.
Timeline
AIMA has categorized this proposal as Medium Priority/Medium Impact and it is therefore represented in mid-dark blue in the AIMA Regulatory Horizon Scan gantt chart.
Estimated Compliance Date3 | May 22, 2025 | **New** |
Estimated Effective Date2 | July 22, 2024 | **New** |
Estimated Publication Date1 | May 22, 2024 | **New** |
Joint trades statutory authority letter | May 3, 2024 | **New** |
Comment deadline | December 27, 2022 | |
AIMA response to proposal filed | December 19, 2022 | |
AIMA summary for members published | November 21, 2022 | |
Joint trades request for extension submitted | November 16, 2022 | |
Proposal published by SEC | October 26, 2022 |
1 Subject to change. We have estimated a publication date based on the SEC's Fall 2023 Regulatory Flexibility Agenda which scheduled this for completion in the first half of 2024. Of course, this is only an estimate and may move forward or backward as actual matters develop and as the SEC's priorities change. The estimate has been provided solely to allow people to visualize the potential overlaps in compliance burdens for multiple pending rules at the same time.
2 Subject to change. The effective date has been estimated as 60 days following publication. Note that for this purpose we have assumed the SEC's publication date and the Federal Register publication date are identical for ease of calculation. This will not be the case, but the actual time between (i) the SEC approval and publication on the SEC website and (ii) the official Federal Register publication is an unknowable period ranging from a few days to several weeks depending on multiple non-transparent variables. This means that in the end the actual effective date and therefore the actual compliance date will always be later than the estimate even if the SEC approval date estimate is correct.
3 Subject to change. The estimated compliance date is based on the proposal's 10 month compliance period starting on the effective date (see note 2 above).