Outsourcing Oversight: SEC Expectations and the Role of Due Diligence Software
This blog post appeared in Integrity Research’s Newsletter December 22, 2025. John McGough, Castine’s Head of Global Business Development is the author.
In November 2022, the U.S. Securities and Exchange Commission (SEC) proposed new rules under 17 CFR Parts 275 and 279 [IA‑6176; S7‑25‑22] to regulate outsourcing by investment advisers. Although the proposal was formally withdrawn in June 2025, it remains a critical roadmap of regulatory expectations. The SEC underscored that advisers cannot delegate responsibility without accountability.
This article explores the proposal’s requirements, why they still matter, and how advisers can proactively strengthen their vendor oversight. It also examines the growing role of vendor due diligence software that helps asset managers evaluate, monitor, and manage third‑party risks in a structured, scalable way. Together, these insights highlight how advisers can remain compliant, resilient, and competitive in an increasingly complex vendor ecosystem.
Background & Context
Outsourcing has become a defining feature of the modern asset management industry. Advisers rely on a wide range of third‑party providers, from data vendors and cloud platforms to fund administrators, trading technology suppliers, and research firms. These relationships enable efficiency, specialization, and scalability. Yet they also introduce new risks: operational fragility, cybersecurity vulnerabilities, regulatory gaps, and reputational exposure.
The SEC’s 2022 proposal sought to codify regulatory expectations around outsourcing oversight. While the rule was withdrawn in 2025, the Commission’s message was clear: vendor oversight is a fiduciary duty. Advisers remain accountable for outsourced functions, and regulators expect firms to demonstrate structured governance over their vendor networks.
What the SEC Proposed
When the SEC introduced its 2022 outsourcing rule, the message was clear: advisers can’t hand off responsibility just because they hand off work. Their proposal spelled out four main obligations. Advisers would need to conduct thorough due diligence before engaging a service provider, looking at competence, compliance capacity, risk profile, and even subcontracting arrangements. Oversight wouldn’t stop there; firms would be expected to monitor providers on an ongoing basis, reassessing performance and suitability to ensure risks were managed continuously.
The rule also tightened recordkeeping requirements under Rule 204‑2, mandating documentation of diligence and monitoring activities, including decisions around retention and termination. And it expanded disclosure obligations under Form ADV, requiring advisers to be transparent about which functions were outsourced, to whom, and where conflicts of interest might arise.
At its core, the rationale behind this rule was investor protection. Outsourcing can introduce hidden risks if advisers fail to oversee vendors properly. The SEC underscored that fiduciary responsibility cannot be delegated, accountability always remains with the adviser, no matter who performs the function.
Why Asset Managers Rely on Due Diligence Software
As vendor networks grow and the types of due diligence become more complex, manual oversight quickly reaches its limits. Asset managers are finding that spreadsheets and email chains simply can’t keep pace. That’s why many managers are turning to vendor due-diligence software, often called third-party risk management platforms, to bring structure and consistency to the process.
These systems are designed to handle just about any kind of review you can imagine. Whether it’s vetting new research firms or brokers, assessing trading counterparties, running cybersecurity checks, evaluating sub-advisors, or managing KYC/KYV obligations, these platforms keep everything organized. It even extends to internal oversight, like tracking employee attestations for outside business interests or certifications.
What makes these platforms so valuable is the way they centralize oversight. Instead of juggling fragmented tools, managers get a single hub where vendor information is collected and analyzed, questionnaires are distributed and tracked, workflows are automated, and risks are scored across multiple dimensions. Every step leaves behind a clear audit trail, and vendors can be monitored continuously throughout their lifecycle.
The result is a smoother, more reliable process. Risks are spotted earlier, oversight is consistent across the organization, and compliance feels less like a burden and more like a natural part of operations. In short, due diligence software doesn’t just replace manual oversight, it transforms it into a competitive advantage.
Why Due Diligence Matters More Than Ever
Across the industry, several forces are converging to make vendor oversight more than just a box-ticking exercise. Regulators like the SEC, FCA, ESMA, and the EBA have made it clear that firms are expected to maintain continuous oversight of their external vendors, not just conduct checks at onboarding and move on. At the same time, the rapid shift toward digitalization has expanded reliance on cloud and SaaS providers, which in turn magnifies cyber risk.
Outsourcing has also grown dramatically, with firms depending on external partners for mission-critical functions that used to be handled in-house. And investors themselves are raising the bar, demanding evidence of strong governance and operational resilience before they commit capital.
This is where due diligence software proves its worth. By centralizing and automating oversight, these systems make the process scalable, reliable, and transparent. Instead of scrambling to keep pace with regulatory expectations, digital risks, outsourcing growth, and investor demands, asset managers can demonstrate control and confidence through a structured, technology-enabled approach.
Key Benefits of Due Diligence Software
- Proactive Risk Management
Every vendor relationship carries risk—financial, regulatory, cyber, or reputational. Software platforms help advisers spot issues early with structured questionnaires and scoring, allowing them to plan contingencies or pivot to stronger providers.
- Confident Regulatory Compliance
Asset management is a heavily regulated industry, and firms must show complete oversight. Platforms centralize documentation, automate reassessments, and align with frameworks like GDPR, SEC and FINRA rules, and MiFID II—reducing non‑compliance risk and strengthening audit readiness.
- Operational Continuity
Critical processes often depend on external vendors. Due diligence software evaluates continuity plans, service history, and dependency risks, helping firms identify weak links and safeguard resilience.
- Cybersecurity Oversight
Vendor breaches are a major threat. Platforms assess cyber hygiene, access controls, and incident readiness, while continuous monitoring flags changes in risk ratings or new vulnerabilities so advisers can act quickly.
- Streamlined Vendor Lifecycle
From onboarding to offboarding, software standardizes workflows—automated questionnaires, scoring dashboards, alerts, and termination records—reducing administrative burden and ensuring consistent oversight across teams.
- Data‑Driven Decisions
Dashboards turn raw data into insights on vendor risks, compliance gaps, and performance. This visibility empowers procurement, compliance, and management teams to make smarter, more strategic choices.
Strategic Implications
For Advisers: Embedding vendor oversight into compliance programs strengthens fiduciary duty and builds investor trust.
For Service Providers: Demonstrating compliance readiness becomes a competitive differentiator.
For Investors: Transparency into vendor oversight reassures clients that advisers remain accountable.
Conclusion
Although the SEC’s 2022 outsourcing proposal has been officially withdrawn, the anticipated requirements of the rule still persist. Regulators continue to emphasize that advisers remain fully accountable for outsourced functions, and vendor oversight is increasingly recognized as a fiduciary responsibility. Delegation does not diminish liability as investment advisers must demonstrate that they have exercised care, diligence, and ongoing monitoring of their service providers.
This is precisely where Castine’s Compliance Telescope delivers value. Our due diligence platform equips asset managers to meet regulatory expectations with confidence. It provides a structured framework for vendor assessments, automates ongoing monitoring, and creates a defensible audit trail that withstands regulatory scrutiny. By embedding oversight into daily workflows, it transforms vendor governance from a reactive obligation into a proactive discipline.
The benefits extend well beyond compliance. Compliance Telescope safeguards operational continuity by identifying and mitigating vendor risks before they disrupt business. It strengthens cybersecurity by ensuring third parties adhere to evolving data protection standards. It enhances decision‑making by providing transparency into vendor performance and risk profiles. And in a global, interconnected ecosystem, it enables firms to manage complex vendor networks with clarity and control.
In summary, vendor oversight through Compliance Telescope is more than risk management, it’s a source of competitive strength. By embracing disciplined, technology‑enabled due diligence, firms not only meet regulatory expectations but also build lasting trust with regulators, clients, and counterparties. In today’s market, governance has become both a safeguard and a differentiator, and Compliance Telescope empowers advisers to turn oversight into strategic advantage.