SEC Highlights Compliance Deficiencies; Offers Exam Guidance for RICs
In a Risk Alert, SEC staff offered guidance based on deficiencies and weaknesses observed during exams of registered investment companies ("RICs" or "funds") and their advisers' compliance programs.
The SEC Division of Examinations provided guidance on its approach to selecting RICs for examination, the likely focus areas during these exams and the types of documents staff will request to initiate the exam.
The Division of Examinations observed fund deficiencies related to compliance programs (e.g. funds that (i) failed to perform required oversight or reviews as stated in their policies and procedures; (ii) were not tailored to the funds' business model or were incomplete, inaccurate, or inconsistent with actual practice; (iii) that had no, or an inadequate, Code of Ethics; and (iv) where the CCOs did not provide requisite written annual compliance reports to fund boards). The staff found deficiencies related to fund disclosure and filings, including, for example, on fund registration statements, annual reports and on sales literature, including websites. The staff also found deficiencies on fund governance practices.
The Division offered guidance to address these issues. Staff stated that a fund may be selected for review based on criteria including prior examination findings, the fund's compliance history, specific business practices or conflicts, tips or complaints and significant changes in fund operations or personnel. Additional factors influencing selection include the fund's investment strategy, risk profile and any new regulatory requirements applicable to the fund or its adviser. To assist funds in preparing for an exam, the Division provided a checklist titled Typical Initial Information Examiners Request of Certain RICs and Their Advisers. This list details the types of documents and information that examiners will initially request, encompassing fund compliance policies, shareholder reports, trade blotters, board meeting materials and records of fund advertisements. Staff said that this initial request provides a foundation for understanding the fund's operations and risk areas prior to a more targeted examination.
Further, the Division emphasized that the scope of an examination will be tailored to the fund's business model and focus on core areas, including (i) compliance program effectiveness, (ii) fund governance and (iii) the accuracy and adequacy of disclosures and regulatory filings. The Division advised that examiners will review critical fund operations, including portfolio management, valuation practices, fees and expenses, conflicts of interest and board oversight of the compliance program.