The SEC's New Rule Proposal

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By Ian Meiksins, Key Bridge Compliance President

The Securities and Exchange Commission proposed a new rule that would require registered investment advisors to conduct due diligence and ongoing review of a vast array of third-party service providers. The proposed rule is coming at a time where outsourcing functions such as compliance, IT, trading and portfolio construction is very common and accepted by most RIA’s.

The SEC has limited the due diligence to “covered functions” which is defined as operations necessary to provide investment advice and, “that if not performed or performed negligently would result in material negative impact to clients.” This broad definition of outsourced providers could be interpreted to cover almost any function, outside of administrative/clerical work.

Registered Investment Advisors would have an initial and on-going burden to conduct due diligence across any service provider deemed as a covered function. The SEC estimates that RIA’s will need to spend, on average, $132,320 in initial one-time fees and an annual spend of $44,106 to comply with this rule. The costs factoring into this are added due-diligence costs such as hiring consultants or other groups to assist with initial and annual reviews. In a tumultuous market and a period of fee compression in the industry, those costs will represent a substantial burden on many Advisors.

The proposal is now in a public-comment period, set to last 60 days from publication on the SEC’s website. 

Direct Link to the SEC’s Press Release: https://www.sec.gov/news/press-release/2022-193

 

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