Legal Risk Management Tips

There are a variety of reasons why financial firms choose to partner with external third-party service providers (“TPSPs”) for the performance of essential tasks, rather than performing such tasks internally.  Such reasons often include, but are not limited to, the financial firm’s experience in performing certain tasks, cost/time restrictions and common industry practice.  Regardless as to the impetus for these relationships, regulators require financial firms to conduct initial and ongoing due diligence on TPSPs. This article will discuss the legal requirements of financial institutions to perform due diligence on TPSPs, examine recent enforcement cases where financial firms failed to properly perform such diligence and offer guidance on what financial institutions should consider when performing due diligence on service providers.

For many investment advisers, using an outside money manager provides a valuable means to
increase efficiencies. As every investment adviser has a fiduciary duty to act in the best interest of its clients, the adviser must consider its expertise and ability to actively manage client accounts at all times. An external manager has the ability to devote full time and attention to managing client portfolios, but moreover, the manager often has specialized capabilities to manage certain investment strategies that are not available to all investment advisers.