Post Summary
Convergence's follow-up to its February 15, 2023 webinar on SEC proposed rule IA-6176, giving responses to three polling questions on service provider due diligence and monitoring.
What respondents consider most important in initial due diligence before selecting a service provider, how often they monitor changes to the information gathered, and how they document service provider choices to justify selection.
54% once per year, 36% when a significant change occurs, 8% once per quarter, and 2% never.
The most common method is a formal DDQ created for each service provider, at about 52%. No formalized process in place currently is second at about 33%.
The most common combination was product technology, staff and product expertise, and price, at about 34%.
Welcome Back Registrants & Attendees!
We wanted to take this time to provide you with the polling question responses. As an industry there is still much work to be done on service provider due diligence and we will continue to provide transparency and updates for this proposed rule as well as any other mission critical thought leadership for financial services.
Please let us know if you have any follow up questions or comments. We look forward to staying connected!
Breakdown of Polling Questions
Question # 1: Pre-Selection Due Diligence
What are the top three important aspects of your initial due diligence before selecting a service provider?
Question # 2 – Post Selection Monitoring
How often do you monitor changes to the information obtained about the service provider during due diligence?
Question # 3 - Recordkeeping
How are service provider choices documented to justify selection?
Convergence Overview
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Investment Advisors
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Our Speakers
John Phinney
Chairman/CEO - Convergence Inc
John spent his entire career as a C-Suite Executive at JPMorgan, Fidelity Investments, TRG Asset Management and Apollo Global Management developing and managing the infrastructure needed to increase revenues, improve efficiency and manage investment and non-investment risk. He is a proven thought leader who has designed and developed several first-ever initiatives, including being a named inventor for a patent for a Tier 1 multinational bank.
Carl J. Versella
Managing Director of Capital Markets and Head of Management Consulting – Convergence Inc
Carl is a C-Suite executive with a successful track record of launching and managing advisory practices (HC Associates, Rothstein Kass, KPMG, Double N Advisors) for middle market and bulge bracket Financial Services companies. He was a key member in the development of Correspondent Clearing and Prime Brokerage businesses for Goldman Sachs, Credit Suisse, and Morgan Stanley.
Christopher S. Avellaneda
Partner – Schulte Roth & Zabel
Christopher S. Avellaneda advises hedge funds, private equity funds and funds of funds on compliance with the Investment Advisers Act of 1940 and other federal, state and self-regulatory organization requirements. Chris has extensive experience providing guidance to clients on establishing compliance programs, registering with the SEC, complying with U.S. securities trading rules and handling SEC examinations.
Key Points
What was the webinar, and what did Convergence publish afterward?
- Subject. The February 15, 2023 webinar covered SEC proposed rule IA-6176, Service Provider Due Diligence & Monitoring for Registered Investment Advisors.
- Follow-up. Convergence sent registrants and attendees the responses to the webinar's polling questions.
- Stated view. Convergence says much work remains on service provider due diligence and that it would keep providing transparency and updates on the proposed rule.
- Speakers. John Phinney (Chairman/CEO, Convergence), Carl J. Versella (Managing Director of Capital Markets and Head of Management Consulting, Convergence), and Christopher S. Avellaneda (Partner, Schulte Roth & Zabel).
- Rule status. The proposal dates to October 26, 2022, and the SEC has since withdrawn it. sec
What did Question 1 ask, and how did respondents answer?
- Question. What are the top three important aspects of your initial due diligence before selecting a service provider?
- Most common combination. Product technology, staff and product expertise, and price, at about 34%.
- Second. Staff and product expertise alone, at about 14%.
- Next three. Technology, expertise, and cyber security platform at about 9%. Technology, expertise, and financial sustainability at about 8%. Expertise, financial sustainability, and cyber security platform at about 8%.
- Common element. Staff and product expertise appears in all five combinations shown.
- Precision. The chart has no data labels, so values are approximate.
What did Question 2 ask, and how did respondents answer?
- Question. How often do you monitor changes to the information obtained about the service provider during due diligence?
- Once per year. 54%.
- When a significant change occurs. 36%.
- Once per quarter. 8%.
Never. 2%. - Combined. 90% monitor once per year or only when a significant change occurs.
What did Question 3 ask, and how did respondents answer?
- Question. How are service provider choices documented to justify selection?
- Formal DDQ. About 52% create one for each service provider.
- No formalized process. About 33% have none in place currently.
- Email traffic. About 15% refer to email traffic for reference.
- Informal discussion. About 11% hold an informal discussion with investors, if asked.
- Precision. Values are approximate, and the bars total more than 100%, as printed in the source chart.
What coverage did Convergence cite for its data in 2023?
- Method. The deck says data is updated daily, with a 95% confidence factor and 10-year time series, sourced from regulatory filings, websites, and third parties.
- Service providers. Over 15,000 global service providers, including 2,000+ administrators, 900+ auditors, 300+ prime brokers, 1,800+ custodians, and 800+ outsourced compliance firms.
- Advisers and funds. 20,000+ SEC-registered and 19,000+ state-registered advisers, 100,000 alternative funds and SPVs, 42,000 mutual funds, ETFs, and UCITS, and 80,000 UK-EU funds.
- Depth. 4,000 data artifacts per adviser and 350 proprietary business rules.
- Scope. 45,000+ private and public fund advisers in 67 countries.