On December 20, 2022, MFA submitted a comment letter to the U.S. Securities and Exchange Commission (SEC) in response to its proposed rule regulating outsourcing by investment advisers.
MFA’s letter details how the SEC’s proposal for adviser outsourcing will hurt the resilience of the alternative asset management industry. The proposal deters investment advisers from taking a risk-based approach to oversight, and harms their ability to use best-in-class service providers. These changes will increase costs and decrease competition, and returns for the pensions, foundations, and endowments who invest with the industry.
The proposed rule will weaken investor protections by restricting advisers’ access to the expertise delivered by service providers. From the letter:
“[T]he Proposal, if implemented, could actually undermine investor protection by disincentivizing the use of third-party service providers (depriving advisory clients of the benefit of service providers’ expertise, efficiencies, and third-party oversight services).”
Smaller and emerging advisers lack the resources to comply with the proposal, decreasing investment opportunities for pensions, foundations, and endowments. From the letter:
“We are especially concerned about the disproportionate impact that the Proposal could have on smaller advisers. Smaller advisers that rely more heavily on external service providers to lower costs would not likely have the operational resources to comply with the extensive requirements set out in the Proposal. These significant hurdles could cause some smaller advisers to exit the market, or could discourage new entrants from starting advisory businesses.”
The proposed rule is overly broad and imprecise, capturing activities outside of the SEC’s stated scope and increasing costs for pensions, foundations, and endowments. From the letter:
“[T]he definition of “Covered Function” is broad and imprecise, and seemingly extends the scope of the rule to the engagement of nearly any “Service Provider” irrespective of whether the adviser has “outsourced” a particular function. This could make the requirements set out in the Proposal applicable to engagements and relationships that should not be (and we do not believe were intended to be) captured, magnifying the costs and unintended consequences imposed by the Proposal without providing any clear benefits to advisory clients or other industry participants. Such an expansive application of the Proposal’s requirements would extend beyond addressing the SEC’s articulated concern in the proposing release regarding an adviser’s ability to maintain full control or direct transparency when outsourcing certain functions.”