Print
E-MailGary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent public statement. The views expressed in this post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.
Today, the Commission is considering whether to adopt proposals regarding investment advisers’ use of third-party service providers. I think that these rules, if adopted, would better protect investors by requiring that investment advisers take steps to continue to meet their fiduciary and other legal obligations regardless of whether they are providing services in-house or through outsourcing, whether through third parties or affiliates.
Registered investment advisers—over 15,000 of them in total—play a critical role in our economy, advising over 60 million accounts with combined assets under management of more than $100 trillion [1] These advisers provide advice to pension funds, endowments, retail investors, and so many others across the American public and beyond.
More than 80 years ago, Congress recognized the importance of investment advisers when they passed the Investment Advisers Act of 1940. They realized that there’s a fundamental difference between an operating company that makes cars and an investment adviser that manages someone else’s money.[2] The Investment Advisers Act includes various obligations, such as fiduciary obligations, to protect the investing public.
Though investment advisers have used third-party service providers for decades, their increasing use has led staff to make several recommendations to ensure advisers that use them continue to meet their obligations to the investing public. When an investment adviser outsources work to third parties, it may lower the adviser’s costs, but it does not change an adviser’s core obligations to its clients.
Thus, today’s proposal would specify requirements for investment advisers designed to ensure that advisers’ outsourcing is consistent with their obligations to clients. In particular, the proposed rules include four requirements for investment advisers:
- First, to conduct due diligence prior to outsourcing certain core advisory functions (covered functions)—as well as to periodically monitor third-party service providers’ performance;
- Second, to maintain books and records related to the oversight of third-party service providers;
- Third, to report census-type information about third-party service providers to the public and the SEC; and
- Fourth, to conduct due diligence and monitoring for third-party recordkeepers and obtain reasonable assurances that the third-party recordkeepers will meet certain standards.
Today’s proposed rules take a principles-based approach to defining covered functions as a service that is necessary to provide advisory services and would materially harm an adviser’s clients or ability to serve clients if it were not performed or performed negligently. I am particularly interested in public feedback on this definition and how we can ensure it captures the appropriate scope of functions.
Under the rules, these covered functions may include providing investment guidelines, portfolio management, models related to investment advice, custom indexes, and investment risk, or trading services or software, among others. Covered functions also may include advisers’ use of software as a service or artificial intelligence as a service, both of which are playing a growing role in the investor advisory space.
I’m pleased to support today’s proposal and, subject to Commission approval, look forward to the public’s feedback on all elements of the proposal.
I would like to thank the SEC staff involved in this proposal, particularly:
- William Birdthistle, Sarah ten Siethoff, Melissa Roverts Harke, Jennifer Porter, Christopher Chase, Christian Corkery, Juliet Han, Holly Miller, and Mark Stewart in the Division of Investment Management;
- Jessica Wachter, Alexander Schiller, Ross Askanazi, Charles Woodworth, Joseph Simmons, Robert Girouard, and Ralph Bien-Aime in the Division of Economic and Risk Analysis;
- Corey Schuster, Jeff Shank, and Andrew Dean from the Division of Enforcement;
- Carolyn O’Brien and Chris Mulligan from the Division of Examinations; and
- Meridith Mitchell, Malou Huth, Natalie Shioji, Robert Bagnall, and Monica Lilly in the Office of the General Counsel.
Endnotes
1Based on analysis of data reported on Form ADV through the Investment Adviser Registration Depository (IARD) system as of April 30, 2021, SEC-registered investment advisers reported $128.2 trillion in regulatory assets under management (“RAUM”) with $116.87 trillion in discretionary RAUM attributable to 47 million accounts and $11.36 trillion in non-discretionary RAUM attributable to 14 million accounts. The data consist of assets that are reported by both advisers and sub-advisers, including mutual fund and ETF assets. (go back)
2See Gary Gensler, “Prepared Remarks At the Institutional Limited Partners Association Summit” (Nov. 10, 2021), available at https://www.sec.gov/news/speech/gensler-ilpa-20211110.(go back)
