November 29, 2021

Volume XI, Number 333

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Division of Examinations Risk Alert Identifies Compliance Issues at Registered Investment Companies

On October 26, 2021, the SEC’s Division of Examinations issued a risk alert identifying observations made during a series of examinations focused on industry practices and regulatory compliance for mutual funds and ETFs that may have an impact on retail investors. The staff’s observations derived from examinations conducted on over 50 fund complexes covering more than 200 funds or series and nearly 100 investment advisers. The staff identified deficiencies or weaknesses in fund compliance programs and the oversight of those programs, fund disclosures to investors and fund governance practices. Based on these observations, the staff identified industry practices that funds may find helpful in their compliance programs.

Fund Compliance Programs. The staff identified the following examples of deficiencies or weaknesses related to the compliance programs of funds and their advisers and the oversight of those programs:

  • failure to monitor and provide adequate oversight of portfolio management compliance, including oversight of fund investments;

  • failure to provide adequate oversight of the valuation of portfolio securities, including establishing policies, procedures and controls over pricing vendor services;

  • failure to provide adequate oversight over trading practices, including trade allocation, prohibited transactions and sharing of soft dollar commissions among clients;

  • failure to oversee conflicts of interest between funds and their service providers, including index providers;

  • failure to provide adequate oversight of the calculation of fees and expenses;

  • failure to establish processes to review advertisements and sales literature;

  • failure to establish policies, procedures and processes for monitoring and reporting accurate information to fund boards;

  • failure to establish processes governing the board’s annual review and approval of fund advisory agreements under Section 15(c) of the Investment Company Act of 1940;

  • failure to complete annual reviews of funds’ compliance programs and to assess the adequacy of annual CCO reports; and

  • failure to adopt or maintain procedures for fund boards over delegated responsibilities.

Fund Disclosures. The staff identified the following examples of deficiencies or weaknesses related to funds’ disclosure to investors:

  • fund disclosures were inaccurate, incomplete or omitted from filings, including disclosures related to changes in investment strategies and potential conflicts of interest; and

  • fund advertising and sales literature presented key information in a manner that was inaccurate or incomplete or omitted key information altogether.

Staff Recommendations for Compliance Program and Disclosure Practices. In conducting its examinations of funds and their advisers, the staff identified several industry practices that may be helpful in developing an effective compliance oversight program, including the following:

  • reviewing compliance policies and procedures for consistency with fund practices;

  • conducting periodic testing and reviews for compliance with disclosures and assessing efficacy in addressing conflicts of interest;

  • ensuring compliance programs adequately address oversight of third-party vendors, including pricing vendors;

  • adopting and implementing policies and procedures that ensure compliance with applicable regulations, align with terms and conditions of applicable exemptive orders and address undisclosed conflicts of interests;

  • providing sufficient and accurate information to the board to allow for effective oversight and assessment of fund compliance programs;

  • ensuring policies and procedures provide for adequate review, and where applicable, amendment of disclosure in fund reports and communications;

  • amending disclosures to reflect actions taken by the funds’ boards and updating funds’ website disclosures concurrently with new or amended disclosures in fund reports and communications;

  • reviewing and testing the accuracy and appropriateness of presentations of fund performance and expenses in fund reports and communications; and

  • implementing processes that assess whether information provided to the board is accurate, including information related to fees, expenses and performance, and investment strategies and risks associated with those strategies.

The risk alert is available here.

© 2021 Vedder PriceNational Law Review, Volume XI, Number 323
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About this Author

John Marten Investment Attorney Vedder Price Law FIrm
Shareholder

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm
Counsel

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney
Shareholder

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

312-609-7697
Ryan Hajen Banking Attorney Vedder Price Chicago
Associate

Ryan Hajen is an Associate in Vedder Price’s Chicago office and a member of the firm’s Investment Services group.

Mr. Hajen focuses his practice on representing registered investment companies, including mutual funds, closed-end funds and exchange-traded funds (ETFs), as well as their independent directors and investment advisers with respect to regulatory, compliance, governance and transactional matters under U.S. securities laws. He frequently counsels clients regarding fund formation and registration issues, ongoing operational and...

312-609 7763
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