Letter to SEC on Outsourcing by Investment Advisers

Vanessa A. Countryman
Secretary
Securities and Exchange Commission
100 F Street NE
Washington, DC 20549–1090

Dear Ms. Countryman:

The American Bankers Association (ABA) appreciates the opportunity to comment on the Securities and Exchange Commission's (SEC or Commission) proposed rule pursuant to the Investment Advisers Act of 1940 that would require certain due diligence, monitoring, recordkeeping, and disclosure by registered investment advisers (RIAs) when engaging third parties to perform certain services. According to the release, the proposal would address SEC concerns with increased outsourcing by RIAs and the attendant risks that these arrangements may pose to clients and to the ability of the RIA to perform its services. Although advisers currently conduct due diligence on third parties under a fiduciary duty to clients, the proposal would expressly prescribe specific requirements for those processes and further require certain assurances from third parties.

On behalf of our member banks, savings associations, and trust companies (collectively, banks), we urge the SEC to (i) consider the effect this proposal would have on well-regulated third parties and on the continued availability of the services they provide, (ii) better align the proposal with existing bank third-party due diligence and oversight obligations, and (iii) if the SEC proceeds to finalize the rulemaking, adopt the recommendations as provided below.

Summary of the Proposal

The SEC proposes to establish a new Rule 206(4)-11 (Service Providers), as well as amend Rule 204-2 (Books and records to be maintained by investment advisers), and Form ADV. The new rule defines a "covered function" as one that "is necessary for the investment adviser to provide its investment advisory services" and that if not performed properly would likely "cause a material negative impact" on clients or the RIA's services. A "service provider" is defined as one that performs a covered function, but is not a supervised person of the RIA.

In order "to prevent fraudulent, deceptive, or manipulative acts, practices or courses of business," new proposed Rule 206(4)-11 would make it unlawful for investment RIAs to retain a service provider to perform covered functions unless the requirements of the rule are met. These requirements include specific due diligence and monitoring to be performed, such as identifying the nature and scope of the services to be performed, how potential risks will be mitigated and managed, a determination of the competency and capability of the service provider, a determination of material subcontracting arrangements of the service provider, and lastly, receipt of "reasonable assurances" from the service provider that it will coordinate with the RIA's regulatory compliance obligations and provide a process for orderly termination of service.

Rule 204-2 would be amended to require additional recordkeeping on the due diligence and monitoring performed on service providers, written agreements with the service provider, as well as receipt of certain assurances from service providers that make or keep any books and records required under the rule. In particular, an RIA must obtain assurances that the service provider will "adopt and implement internal processes" to keep records required under the rule, as well as "allow the investment adviser and staff of the Commission to access the records easily through computers or systems during the required retention period pursuant to the section."

Form ADV would be amended to require additional disclosure about service providers. Although the purpose of such disclosure is to "help the Commission and its staff in their efforts to oversee" RIAs and to "enhance client and investor disclosures," the now confidential information about service providers would be made available to the public on the Commission's website.

Download the comment letter to read the full text.