Compliance & Regulation

What’s in and out of outsourcing proposal

A proposed regulation governing outsourced services gives examples of what would be in the rule and what services would be outside the rule.

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A 232-page proposal approved last month by the Securities and Exchange Commission means your to-do list may grow substantially if you outsource critical services, because the due diligence called for would have to be completed before hiring the firm.

Proposed rule 206(4)-11 defines a “covered function” as one that’s “necessary for the investment adviser to provide its investment advisory services” in a compliant manner and that, if not performed well, could likely “cause a material negative impact on the adviser’s clients or on the adviser’s ability to provide investment advisory services.”

Another key definition is “service provider.” This would be someone who performs “one or more Covered Functions” and isn’t a supervised person of the adviser. The proposal would require advisers to keep an eye on their key service providers (see the related story).

So, what’s key? The proposed rule and the preamble give examples of what would be in the rule and what services would be outside the rule:

In

      • Client services
      • Cloud companies providing key services
      • Compliance with investment guidelines/restrictions
      • Compliance
      • Creating/providing models related to investment advice
      • Cybersecurity
      • Investment research and data analytics
      • Investment risk software/services
      • Key services provided by affiliates
      • Outsourcing records administration
      • Personal securities trading clearance
      • Portfolio accounting
      • Portfolio management
      • Pricing/valuation
      • Providing custom indexes
      • Reconciliation
      • Subadvisers
      • Trade communication and allocation
      • Trading desk/execution/risk management

Out

      • Clerical services
      • Facility maintenance
      • General office services
      • Lease of commercial office space/equipment
      • Licensing of general software for operating systems that are widely commercially available
      • Marketers/solicitors
      • Ministerial services
      • Public utilities
      • Word processing systems, spreadsheets, or other similar off-the-shelf software