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Accountability in an Evolving Asset Management Industry

Oct. 26, 2022

Today, the Commission is proposing a set of key reforms that would bring accountability and enhanced investor protections when an investment adviser outsources its activities. I am pleased to support today’s proposal.

As of this month, there are over 15,000 advisers registered with the Commission. By one estimate, over the last twenty years we’ve seen more than a six fold increase in the amount of assets managed by SEC-registered advisers.

The growth in numbers and assets under management has been accompanied by a changing technological landscape. Certain firms are providing investment advice solely through digital platforms. Firms are increasingly communicating and connecting with their clients through social media. Other firms are using analytical tools to develop their investment advice. Technological advancements have also been fueled by the need for increased efficiencies to meet investor demand, whether organically or through exigent and long-lasting events, such as the COVID-19 pandemic. 

As advisers adapt and change the way they operate, and as a result outsource more and more of the functions necessary for their advisory services, there can be significant implications for investor protection.

Heightened risks for investors can arise when many advisers use the same service provider for multiple services, when there’s mismanagement of outsourced functions, or when there are gaps in outsourced compliance functions.

Poor oversight over outsourced functions also can be harmful to investors – many of whom entrust their life savings with their advisers and may be unaware that certain functions are outsourced.

Regardless of whether an adviser outsources certain of its functions, it must act in the best interests of its client at all times. An adviser’s legal obligations under the Federal securities laws do not change when the adviser outsources. Effective, continuous oversight over outsourced functions is critical to ensuring an adviser’s legal obligations continue to be met.

Outsourcing could also pose significant systemic risks, particularly if a widely-used provider of a specialized function fails to perform. It’s important that advisers evaluate how dependent they are on a particular service provider and the impacts on the adviser and clients in the case of service disruptions. Today’s proposal would provide minimum requirements for ongoing due diligence and monitoring of those providers.

The proposal also provides for the collection of census-like data on advisers’ service providers, including the location of the office principally responsible for the covered functions. In reviewing this proposal, it became clear to me that there’s a significant lack of visibility in this area, which could limit our ability to assess systemic risks or potential threats to financial stability.

The data-gathering component of the proposal would improve our ability to identify concentration of service providers in specific regions for certain functions, domestically and abroad. As regulators, we need to remain vigilant when we observe significant and widespread use of one or a small number of service providers for critical and specialized services and to have a clear picture of where these activities are occurring.

Again, I am pleased to support this proposal and appreciate the work of the Commission staff, and particularly staff in the Division of Investment Management, in crafting it.

Thank you.

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