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17 January 2023

SEC Proposal: Outsourcing Due Diligence

Investment advisors could face less compliance reporting flexibility under the Investment Advisors Act of 1940.

On October 26, 2022, the SEC proposed to prohibit investment advisors from outsourcing certain services or functions without first meeting six specific minimum requirements of due diligence. The commission included thirteen covered functions in the proposal, with four functions being pricing, reconciliation, and trade communication and allocations [1]. In addition to the due diligence assessment, advisors would be required to create and retain records, including a list of covered functions the advisor outsources to service providers:

  • Name of each service provider
  • Factors that led to listing it as a covered function on Form ADV
  • Documentation of the adviser’s due diligence assessment

While some are in favor of the proposal, many advisors and advocacy groups are describing it as unnecessary and costly [2]. As the Advisors Act currently stands, advisors have a fiduciary obligation to act in the best interest of their clients and conduct systematic and organized reviews of their operations and activities, including service providers [3].

The current framework allows advisors to tailor their compliance programs based on their unique business offerings. With the new proposal, “Advisers must satisfy numerous specific requirements, which would need to be met by all SEC-registered advisers, regardless of size, client base, business model, or risk profile, or, indeed, whether it would be possible in some cases for advisers to comply [3].

How SS&C Advent can help:

The SEC provided estimated costs advisors will face implementing the proposal [1].
For a single adviser firm: 

  Initial, one-time burden (hours)  Initial, one-time burden ($)  Annual burden (hours)  Annual burden ($) 
Single Advisor (minimum)  440 132,320 147 44,107
Single Advisor (maximum, 3x)  1,320 396,960 440 132,320

 


For the advisory industry:  

  Initial, one-time burden (hours)  Initial, one-time burden ($)  Annual burden (hours)  Annual burden ($) 
Single Advisor (minimum)  6,492,640 1.953 billion 2,164,213 650,837,973
Single Advisor (maximum, 3x)  19,477,920 5.858 billion 6,492,640 1.953 billion


SS&C Advent Managed Services removes these upfront burdens by providing the requirements of due diligence and ongoing compliance documentation for clients. In addition to SOC 1 Type 2 reports, the Managed Services Console, an intuitive communication portal, provides clients with a detailed, real-time view of the status of their selected services, data feeds, and automation, acting as an activity audit log. By partnering with SS&C Advent, our clients have peace of mind knowing we are a trusted and time-tested technology and service provider.

How SS&C Advent solves for SEC’s six proposed due diligence elements:

  • The nature and scope of the services:
    SS&C Advent deliverables are clearly defined in client agreements.
  • Potential risks resulting from the service provider performing the covered function, including how to mitigate and manage such risks:
    As a business unit of SS&C, we have a disciplined approach to application security, a proven Business Continuity Plan, and Global Risk and Compliance and Supplier Risk Management teams.
  • The service provider’s competence, capacity, and resources necessary to perform the covered function:
    SS&C Advent is helping 4,300+ investment firms in more than 50 countries. Our success today is rooted in our 40-year history and driven by the success of our clients. We provide SOC 1 Type 2 reports reports for our managed services.
  • The service provider’s subcontracting arrangements related to the covered function:
    Although few, critical subcontractors are defined in our client agreements. In addition, SS&C has a Supplier Risk Management group dedicated to performing due diligence on critical suppliers.
  • Coordination with the service provider for Federal securities law compliance:
    Our responsibilities to comply with Federal securities law are defined in our client agreements.
  • The orderly termination of the provision of the covered function by the service provider:
    As part of an orderly termination, Customer Data will be returned to Advent customers and advisor rights are clearly defined in our client agreements.


We will continue to monitor the proposal and provide support for our clients. Learn how our managed services offering can keep you up to date and prepared for any future regulatory changes, providing you with an operational advantage.

Related Resources:

[1] Securities and Exchange Commission, Outsourcing by Investment Advisors (2022, December 26) Retrieved from: https://www.sec.gov/rules/proposed/2022/ia-6176.pdf

[2] Outsourcing by Investment Adviser 2022 (2022, December 27) Retrieved from https://www.sec.gov/comments/s7-25-22/s72522.htm

[3] IAA Letter to SEC on Service Provider Outsourcing 2022 (2022, December 23) Retrieved from https://investmentadviser.org/resources/iaa-letter-to-sec-on-service-provider-outsourcing/