IAA Submits Second Comment Letter on Overly Burdensome Outsourcing Proposal

April 20, 2023

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Contact:
IAA VP of Communications & Marketing Janay Rickwalder.

Proposal is not adequately tailored to the range of firms it covers.

April 20, 2023 (Washington, D.C.) The Investment Adviser Association (IAA) submitted a second comment letter to the SEC urging the Commission to withdraw or make substantial changes to its proposed new rule. The proposal would establish prescribed oversight requirements for investment advisers that outsource certain functions to service providers.

“The proposal is unnecessary and unwarranted, as well as overly burdensome and prescriptive,” said IAA General Counsel Gail Bernstein. “Investment advisers already have a fiduciary duty to oversee their service providers. This proposal fails to recognize how little leverage advisers have to negotiate terms with many service providers.”

The IAA submitted an initial comment letter just prior to the winter holiday deadline, signaling our intention to submit a supplemental comment letter after we had the opportunity to analyze the myriad downstream impacts of the proposal on the adviser and service provider ecosystem.

“As written, the proposal is not adequately tailored to the range of firms it covers, and will be especially challenging for smaller advisers,” said Bernstein. “It is also apparent that the SEC again has not appropriately considered the interrelatedness of its wave of new proposals or their cumulative impacts on advisory firms of all sizes.”

The IAA’s comment letter reiterates the association’s initial recommendation that – instead of moving forward with a new outsourcing rule – the SEC:

• Confirm that the Advisers Act Compliance Rule currently requires advisers to adopt and implement outsourcing policies and procedures pursuant to their fiduciary duty.
• Consider issuing guidance to help advisers improve their service provider oversight, while allowing them to leverage their existing processes as much as possible.

In the event the SEC moves forward with a new outsourcing rule, the IAA recommends the following:

• Ensure that any new rule is principles- and risk-based;
• Narrow the covered functions that are in scope to core advisory functions under an alternative definition that we offer;
• Exclude certain categories of service providers that do not raise the concerns the SEC appears to be trying to address;
• Permit adviser due diligence and monitoring requirements to be risk-based and exclude any requirements for advisers to obtain written assurances;
• Remove prescribed Form ADV covered function categories;
• Require reasonably designed recordkeeping policies instead of prescriptive requirements;
• Extend the transition period from 10 months to 18 months for larger firms and 24 months for smaller firms; and
• Formally reopen the comment period to provide an opportunity for all stakeholders to provide additional feedback.

The IAA’s comment letter is available here.

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About the Investment Adviser Association

The Investment Adviser Association (IAA) is the leading trade association representing the interests of fiduciary investment advisers. The IAA’s member firms collectively manage more than $35 trillion in assets for a wide variety of institutional and individual investors. In addition to serving as the voice of the advisory profession on Capitol Hill and before the SEC, DOL, CFTC and other U.S. and international regulators, the IAA provides extensive practical and educational resources to its membership. For more information, visit www.investmentadviser.org or follow us on LinkedIn, Twitter, and YouTube.