RIA Compliance and Practice Management Blog

Top RIA compliance news articles for the week of Dec. 30, 2022

Posted by RIA in a Box

Jan 6, 2023 11:16:13 AM

RIA outsourcing rule

Each Friday, we are giving you our weekly report highlighting the top compliance news articles from various industry news publications. We have selected the most relevant and important news articles related to registered investment adviser (RIA) compliance and regulatory issues. This week's recap focuses on the Securities and Exchange Commission’s (SEC) proposed rule about outsourcing and independent contractors, the various opinions surrounding the proposal, and how investment options can change in light of the U.S. Department of Labor’s (DOL) recently proposed rule concerning environmental, social and governance (ESG).

Here are our top investment adviser compliance articles for the week of Dec. 30, 2022:

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SEC meets strong industry resistance on adviser outsourcing proposal (Author – Gregg Greenberg, Investment News)

In late October of 2022, the SEC released a proposal that would establish due diligence and monitoring requirements for advisers who hire a third party to perform a “covered function.” This proposed rule, sometimes referred to as the “outsourcing proposal” or “independent contractor proposal,” was developed to protect against potential investor harm if advisers don’t properly vet and monitor their service providers.

Despite its good intentions, the proposed rule has been met with great opposition. Trade associations representing investment advisers and the financial industry have argued the rule would be superfluous if enacted, because advisers’ fiduciary duty already requires them to ensure that outsourcing firms are acting in their clients’ best interest.

The deadline for public comments has already passed. The SEC has received about 90 letters. The agency will review the input and could modify the proposal before releasing a final version. The timeline is unclear.


IAA says SEC proposed outsourcing regs are impractical (Author – Tracey Longo, Financial Advisor)

The SEC’s proposed outsourcing regulation has been met with opposition and accusations that it’s impractical.

In a letter to the agency, the Investment Advisor Association's (IAA" general counsel Gail Bernstein said, “While we understand the SEC’s objectives, we believe that the proposal is unnecessary. As fiduciaries, advisers are responsible today for all aspects of their advisory relationship, regardless of whether any functions or services are outsourced, and must already have programs in place to manage their outsourcing.”

Similarly, trade groups have asserted that the proposed rule would create unnecessary stress for firms. They assert that the measure would significantly increase advisers’ regulatory costs.


RIA fears DOL independent contractor proposal will hurt business (Author – Allison Bell, Think Advisor)

The definition for “independent contractor” differs from state to state. The DOL has proposed changing the definition so that it is stricter than the current federal definition, but looser than the definition used in states with stricter definitions. The DOL is essentially trying to create a universal definition.

This proposal has been met with mixed responses. Some financial services sector commenters predict the proposal would make it easy for independent contractor financial professionals to continue operating as independent contractors. However, some argue that the definition might make it more difficult for those who are currently operating as independent contractors to continue operating as such. Similarly, professionals who operate as independent contractors might face their own fights to avoid turning into employees.


ESG has DOL’s blessing. Here’s what can happen next in 401(k)s (Author – Emile Hallez, Investment News)

A landmark rule recently finalized by the DOL allows retirement plans to use ESG-themed target-date funds. While the new rule doesn’t require that plan sponsors consider ESG factors, it allows them to be viewed as material and even cared for as collateral benefits to the plan.

For investment advisers, this means that the social and environmental benefits of an investment option alone aren’t enough to justify its selection. When vetting investment options, whether they’re the default plan or any other fund their firm offers, plan fiduciaries must primarily consider risk and return, which may now include ESG factors that are material to performance. Additionally, in cases where ESG factors may not be financially material, plans can still opt for funds if the risk and return characteristics are the same as other options.


Advisers divided on SEC’s proposed outsourcing rule (Author – Dan Shaw, Financial Planning)

While opposition toward the SEC’s proposed outsourcing rule has been loud, attention should be given to those who are in favor of the proposed rule, too. Those who are in favor of the proposed rule assert that it is needed, because it could force firms to be more upfront about how much investment work they may or may not be doing on behalf of clients. Essentially, the rule could encourage investment firms to be more transparent in how they serve their clients, which could lead to greater trust in the industry.

Ivan Illan, the founder and chief investment officer at Aligne Wealth Advisers Investment Management, said that many advisers devote most of their time to maintaining relationships with current clients and trying to bring in new ones. The actual work of investing is often outsourced to services that provide various asset-management services in return for fees. According to Illan, if the SEC’s proposed outsourcing rule requires advisers to be more forthcoming about how they operate, that can only be good for the industry and in building client trust.

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Don't forget to check out last week's top RIA compliance news articles recapping the top 2022 regulations from the SEC and the Financial Industry Regulatory Authority (FINRA), the market’s response to a proposed Department of Labor (DOL) rule, a new bill which could require the SEC to allow e-delivery for regulatory documents, potential sweeping market reform from Chair Gensler and a look at the risk and opportunity of cryptocurrency.

Topics: RIA Operations, RIA Compliance, RIA Technology

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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