Advisers Should Comment, Prepare Vendor List Ahead of SEC Outsourcing Rule

Wealth management and retirement plan providers should send in feedback about the SEC’s proposal for advisers to vet third-party vendors, while also preparing for the potential regulation with an inventory of their external providers, according to industry consultants.

The proposal, released on October 26, calls for RIAs to satisfy due diligence factors before signing with a third-party service providers, monitoring their practices periodically, and reporting their names in regular SEC reporting. The 60-day comment period in which they can inform the SEC of how this will impact their everyday business practices will be end December 27.

The proposal will affect everyone advising clients about retirement investment offerings, but it will create the biggest burden for small, independent firms, says Bonnie Triechel, co-founder and chief solutions officer at consultancy Endeavor Retirement.

“This is one more thing to add to the [regulatory] list, and it is going to be most strenuous for those small RIAs if passed as proposed,” Triechel tells PLANADVISER.

Triechel notes the many regulatory factors that a small advisory shop has to manage already, from U.S. Department of Labor guidance about cybersecurity, to SEC regulations about marketing to clients, to awareness of new rules about environmental, social, and governance investing.

The outsourcing regulations as proposed would require a number of governance activities for retirement advisers overseeing investment decisions that would take additional time and resources, Triechel says. These include: identifying what services would need vetting (excluding things like janitorial office services), initial due diligence of the required providers, consistent monitoring of said vendors, and regular disclosure of the providers to the SEC on Form ADV.

That last item of reporting, she says, would also be a way for the SEC to identify wheher advisers are failing to report if regulators don’t see vendors being listed by firms who typically would outsource.

When it comes to retirement plan advisers, the rule will depend on whether their practices touch investment decisions for clients, said Jason Roberts, Chief Executive Officer of the Pension Resource Institute, in an emailed response. That may be a large pool of retirement plan advisers, since years of acquisition and consolidation has brought wealth management practices into retirement shops.

“In other words, this rule will affect most RPA firms even if they don’t outsource any or much in connection with providing retirement plan-related services,” Roberts wrote.

Smaller, individual retirement plan advisers tend to outsource fewer functions than retail wealth managers, Roberts noted. That said, those that do serve trustee-directed plans such as pensions and cash balances are traded in the same fashion as retail investments, in which case they would have to abide by the outsourcing rule.

“To the extent the adviser uses third-party subadvisors, signal providers, model managers, etc., then it would be covered arrangement under the proposed outsourcing rule,” he said.

Roberts said the most important aspect of the proposal industry players to note is that outsourcing coverage depends on an adviser’s “retention of a service provider to perform a covered function.” This would not cover arrangements where the client selects and retains a service provider on their own, he says.

“If we take that statement at face value, then covered functions for most RPAs – which transcend their retirement plan services – would include more general RIA operations (vs. the delivery of advice to plans or participants), including but not limited to: client services, compliance, cyber security, and compliance and training recordkeeping,” he wrote.

If retirement plan advisers retain services on their own, those would fall under the ruling, such as: sub-advisory, investment guidelines or restrictions, investment risk analysis, and portfolio management, Roberts said.

Both Roberts and Triechel say smaller firms can take action to help shape the final rule by telling the SEC how it would impact their business practices during the remainder of the comment period.

“They can help regulators understand the practical impact of rulemaking,” Triechel says. “What the SEC is doing is trying to do is protect investors … advisers should provide a point of view from the practical side of how they can protect investors without taking on onerous new requirements.”

Both consultants also encourage advisers to take stock now of their vendors in preparation for some form of the rule passing.

“What RIAs can do to start preparing includes, at a minimum, inventorying covered functions (under the proposal) and evaluating the impact of bringing those inhouse vs. complying with the proposed requirements,” he said.

In the end, Treichel says, the proposal as it stands may push some small firms to look for partnerships, or even a sale.

“That may lead to a disservice to investors because they’ll have fewer options,” she says. “Advisers can educate the SEC on how they can still protect investors without having these additional burdens.”