According to the SEC, as the asset management industry has grown and clients’ needs have become more complex, “many advisers have engaged third-party service providers to perform certain functions or services, many of which are necessary for an adviser to provide its advisory services in compliance with the Federal securities laws.” Examples of outsourced functions include providing investment guidelines, portfolio management, models related to investment advice, indexes or trading services. Although outsourcing can benefit advisers and their clients, the SEC warned that clients could be significantly harmed when an adviser outsources a function or service without appropriate oversight. In response to that perceived concern, the SEC issued a proposal (Proposal) that would impose a comprehensive due diligence, monitoring and recordkeeping framework on advisers that outsource so-called “covered functions.” The deadline for comments on the Proposal is December 27, 2022. This article, the second in a two-part series, identifies key issues with the Proposal and a key takeaway for hedge fund managers. The first article detailed the Proposal, including the SEC’s rationale for it and the views of several Commissioners. See “IOSCO Issues Seven Key Outsourcing Principles” (Dec. 16, 2021); and “NFA Issues New Rules On Use of Third Parties to Perform Members’ Regulatory Functions” (May 27, 2021).