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07 June 2023

Navigating Outsourcing in the Age of SEC Proposals and Rulings

The wave of new regulatory proposals and rulings confronting investment managers is creating a significant strain on resources. Further compounding this challenge are operational inefficiencies and the systemic shift in workplace dynamics. As a result, firms no longer question whether to outsource but rather ask how, which functions, and what vendor.  

Traditionally, firms elected outsourcing to gain a compliance advantage; however, the new SEC Outsourcing Due Diligence proposal will complicate compliance reporting, increase requirements, and raise costs initially intended to be passed on to the vendor.[1] Furthermore, these mandates overlap with current requirements under their Fiduciary Duty. This proposal is particularly challenging for smaller investment firms that need more resources to comply, thereby putting them at a competitive disadvantage. 

The Investment Adviser Association (IAA) highlighted this rule at its recent Compliance Conference in Washington, DC. The event provided an opportunity for firm executives to discuss how to manage ongoing compliance challenges. As a panelist, I was excited to discuss best practices for due diligence of outsourcing to service providers with two Chief Compliance Officers. 

How to choose what functions to outsource? 

During the panel, we were asked when do you determine to bring something in-house versus hiring an outside party? From my perspective, a firm should first assess its specific business requirements and challenges, including:  

  • Resource constraints
  • IT infrastructure
  • Expansion plans
  • Regulatory compliance 

Server upkeep and labor-intensive reconciliation tasks are two functions that are better suited for outsourcing, as it gives firms the flexibility to expand their operations and pursue growth without being hindered by operational or system constraints. In a recent SS&C Advent case study, Gerry Moore, Chief Operating Officer of First Trust Direct Indexing, explains, “Outsourcing key operational and technical components to an organization that can add incremental resources as we grow is a great advantage.” Further, “We’ll have to build out some infrastructure, but not as much as we would without Advent. It’s helping us scale more efficiently.” 

How to choose a reliable partner? 

Once a company determines which functions to outsource, the next step is evaluating and choosing a reliable managed services partner. The consensus from the panel is to:  

  • Ask for references
  • Understand its reputation in the industry 
  • Speak to current clients to determine a day in the life
  • Request the SEC Due Diligence proposal and ongoing compliance documentation 

Moreover, understanding the technology, processes, and roadmap the vendor uses is critical to ensuring that the outsourced functions are handled effectively and efficiently. It's important to assess whether the managed services provider has the necessary resources, expertise, and commitment to continually invest in their technology and services. This type of review is critical in today's rapidly evolving business environment, where technology plays a crucial role in driving a firm’s growth. 

The key takeaway: Outsource, but verify.  

Outsourcing provides many benefits, including reducing operational and compliance risks, providing scalability and flexibility, and, most importantly, empowering firms to focus on their core business. However, these benefits can only be realized if the managed services provider can meet the firm’s business needs, help keep the firm SEC compliant, and has the commitment and resources to continually reinvest in its technology and services.  

To learn more about the SEC Due Diligence proposal and how firms think about outsourcing, read our blog, SEC Proposal: Outsourcing Due Diligence, and watch the IAA Compliance Conference panel. 



[1] Securities and Exchange Commission, Outsourcing by Investment Advisors (2022, December 26) Retrieved from: