Due Diligence for Advisers & Sub-Advisers

In an April 2003 speech by Lori Richards, the then-director of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations mentioned one area where she believed some less-than-meticulous care has been given: the supervision of service providers and in particular, sub-advisers.

“I doubt anyone questions the need for an adviser, before contracting with a sub-adviser, to conduct an initial due diligence review into the qualifications and suitability of the sub-adviser. What is important in reviewing a potential sub-adviser though, is not just its performance “track record,” but also the compliance controls that the sub-adviser has in place in all areas of its business that will affect clients of the primary adviser. And, after the contract is signed, the adviser needs to perform due diligence on a continuing basis. On a continuing basis, the adviser must concern itself with whether the sub-adviser is, in fact, providing the level of fiduciary care that the adviser itself provides to its clients. One practice that may be effective is for the adviser to conduct compliance audits of the sub-adviser, or for the sub-adviser to provide the adviser with copies of its internal or external compliance audit reports.”

In the time since the speech, the advice about sub-adviser due diligence has only grown in importance.

What makes a registered investment adviser (“RIA”) attractive as a potential sub-adviser? At the top level, this includes key areas such as what differentiates a firm from others; what is the culture – student or master; is there a comprehensive business plan; is there an understanding of the behavior of performance; and how strong is the infrastructure: investment personnel, operations client service, and, what we will focus on in this paper, compliance. Each of these items require a separate due diligence review. If you are an RIA hoping to be hired as a sub-adviser, you need to be prepared to respond to detailed questions and provide evidence that you have memorialized your internal testing. If you are an RIA who is hiring sub-advisers, you need to have in place disciplined policies and procedures around how you will conduct your pre-hire and ongoing due diligence program.

Fill in & submit the form below to download this Whitepaper

Thank you!

Your download will appear below momentarily.

Download Now.

Latest Content

From One CCO to Another: Don’t Lie to the SEC

Every once in a while, I think it’s important to get back to the basics. Since the adoption of the compliance rules in 2004, the Securities and Exchange Commission staff has repeatedly stated that the intent of the rules were not to hunt CCOs. Great pains have been made to enlist CCOs support in ensuring … Continued

BME Partners with CSS to Strengthen its Regulatory Service Suite

BME to offer financial services firms in Spain and Portugal a multi-regulation reporting platform Partnership brings a unique combination of local market presence and global coverage BME has partnered with Compliance Solutions Strategies (CSS), a leading RegTech platform provider, to offer a global regulatory reporting solution in Spain and Portugal. The combination of BME’s local … Continued

Compliance Solutions Strategies Acquires AMFINE

Combination Creates First Fully End-To-End Compliance Reporting Platform NEW YORK, September 10, 2020 – Compliance Solutions Strategies (“CSS”), a leading RegTech platform providing technology-driven solutions which enable financial services firms to meet mandatory regulatory compliance requirements, today announced the acquisition of AMFINE (“AMFINE”), a provider of SaaS-based regulatory reporting services to European asset managers, asset … Continued