Glaringly missing from the SEC’s Spring 2023 Regulatory Agenda released June 13 was consideration of the Commission’s outsourcing by investment advisers rule proposal this year. The controversial proposed rule aimed at the oversight of third-party service providers now has a timetable for “final action” of April 2024.
The delay likely reflects some internal wrestling going on behind the scenes between SEC commissioners. The proposal, approved last October, was only passed by a 3-2 vote by SEC commissioners. At the time, the two dissenting commissioners, Hester Peirce and Mark Uyeda, expressed their concerns that, if approved, the new requirements could further burden investment adviser CCOs already dealing with a full regulatory agenda.
‘Unnecessary and unwarranted’
The calendar push back also likely speaks to the considerable critical feedback received by the Commission from industry participants. The proposed rule’s comment period closed at the tail end of December and nearly 100 comments were received. The Investment Adviser Association—which characterized the proposal as “unnecessary and unwarranted”—is so chagrined with the proposal it determined to submit two separate comment letters.
Industry groups have also been taking a slew of meetings with senior SEC officials on the outsourcing proposal. In addition to the IAA, the Commission has held 21 meetings with interested parties. The SEC’s Office of the Chair, Division of Investment Management, Division of Risk Analysis, Office of Public Engagement, and commissioners Peirce, Uyeda, and Caroline Crenshaw have heard from the likes of the Managed Funds Association, SIFMA, the Investment Company Institute, CalPERS, and Goldman Sachs, among others.
Due diligence
The proposed outsourcing rule would require advisers to conduct due diligence prior to engaging a service provider and to periodically monitor performance and reassess retention. If finalized, the proposal would set out six topics for advisers to probe: 1) the nature of the “covered function;” 2) potential outsourcing risks; 3) the vendor’s competence, capacity, and resources; 4) the vendor’s “material” subadviser arrangements; 5) the vendor’s coordination with the adviser to satisfy securities laws; and 6) the orderly termination of the vendor’s services.
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