Registered Investment Company Initiatives Exam Observations

Publish Date


Compliance Alert


  • Compliance
  • SEC

On October 26, the U.S. Securities and Exchange Commission’s (SEC) Division of Examinations (the Division) issued a Risk Alert that provides observations from examinations conducted as part of the Division’s registered investment company initiatives (RIC Initiatives). Announced in a November 2018 Risk Alert and included in the Division’s fiscal year 2019 priorities, the RIC Initiatives involved a series of examination initiatives focused on mutual funds and exchange-traded funds to assess industry practices and regulatory compliance in certain areas that may have an impact on retail investors.

The RIC Initiatives focused on funds and/or their investment advisers that fell into one or more of the following six categories:

  1. Index funds that track custom-built indexes
  2. Smaller ETFs and/or ETFs with little secondary market trading volume
  3. Mutual funds with higher allocations to certain securitized investments
  4. Mutual funds with higher allocations to certain scrutinized investments
  5. Mutual funds managed by advisers that are relatively new to managing such funds
  6. Advisers that provide advice to both mutual funds and private funds, both of which have similar strategies and/or are managed by the same portfolio managers

The October 26 Risk Alert provides highlights from observations made by Division staff during examinations of more than 50 fund complexes and nearly 100 advisers. Though not all firms examined were issued deficiency letters, the Division believes the observations can assist all funds in developing and enhancing their compliance programs and practices.

Focus of the RIC Initiatives

The scope of the Division’s examinations and focus areas were tailored to address the business practices, risks, and conflicts applicable to each of the RIC Initiatives’ six categories. However, across all examinations the staff generally assessed:

  • Effectiveness of the compliance policies and procedures of the funds and their advisers to address certain risks – particularly in the areas of disclosures, portfolio management compliance, and conflicts of interest – and the efficacy of the oversight of funds’ compliance programs by funds’ boards
  • Disclosures by the funds to investors in their prospectuses and other filings and shareholder communications, and by advisers to the funds’ boards, regarding risks and conflicts in the highlighted areas
  • Fund governance practices, particularly as they relate to the deliberative processes utilized by funds and funds’ boards when exercising oversight of funds’ compliance programs and assessing the practices and controls related to risks in the highlighted areas

Highlights of the issues and deficiencies observed by Division staff

Compliance programs

Division staff observed issues and weaknesses related to funds’ and their advisers’ compliance programs for portfolio management and other business practices, and board oversight of funds’ compliance programs.

The staff observed funds and their advisers that did not establish, maintain, update, follow and/or appropriately tailor their compliance programs to address various business practices, including:

  • Portfolio management
  • Valuation
  • Trading
  • Conflicts of interest
  • Fees and expenses
  • Fund advertisements and sales literature

Division staff also observed issues with funds’ policies and procedures for their boards’ oversight of the funds’ compliance programs.

Disclosures to investors

Division staff observed deficiencies or weaknesses related to the funds’ disclosures to investors in the following areas:

  • Fund filings;
  • Advertisements;
  • Sales literature; and/or
  • Other shareholder communications

Staff observations to assist funds and their advisers

Division staff observed various practices with respect to funds’ and their advisers’ compliance programs, the boards’ oversight of funds’ compliance programs, and disclosure practices that funds and their advisers may find helpful in their compliance oversight practices. Below is a sampled list of practices that may assist funds and their advisers in designing and implementing their compliance programs.

Certain funds and their advisers adopted and implemented compliance programs that provided for the following:

  • Conducting reviews of compliance policies and procedures for consistency with practices (e.g., funds reviewed their advisers’ compliance manuals for specific policies and procedures addressing various risk areas for which the funds had delegated responsibility to their advisers).
  • Conducting periodic testing and reviews for compliance with disclosures (e.g., review whether funds are complying with their stated investment objectives, investment strategies, restrictions, and other disclosures) and assessing the effectiveness of compliance policies and procedures in addressing conflicts of interests (e.g., review trade and expense allocation policies and procedures in light of potential conflicts that may exist among the various types of accounts managed by the adviser).
  • Ensuring compliance programs adequately address the oversight of key vendors, such as pricing vendors (e.g., written pricing vendor oversight processes include reviewing variance reports on stale or outlier prices and price challenges).
  • Adopting and implementing policies and procedures to address:
    • compliance with applicable regulations (e.g., to identify cross trades, where applicable, and prevent related violations)
    • compliance with the terms and conditions of applicable exemptive orders and any disclosures required to be made under the order
    • undisclosed conflicts of interest, including potential conflicts between funds and/or advisers and their affiliated service providers

Certain funds’ boards provided oversight of funds’ compliance programs by assessing whether:

  • The information provided to the board was accurate, including whether funds’ and their advisers were accurately disclosing to the boards:
    • funds’ fees, expenses and performance
    • funds’ investment strategies, any changes to the strategies, and the risks associated with the respective strategies
  • The funds were adhering to their processes for board reporting, including an annual review of the adequacy of the funds’ compliance program and effectiveness of their implementation.

Certain funds adopted and implemented policies and procedures concerning disclosures, such as those that required:

  • Review and amendment of disclosures in funds’ prospectuses, SAIs, shareholder reports or other investor communications consistent with the funds’ investments and investment policies and restrictions
  • Amendment of disclosures for consistency with actions taken by the funds’ boards, as applicable
  • Update of funds’ website disclosures concurrently with new or amended disclosures in funds’ prospectuses, SAIs, shareholder reports or other client communications
  • Review and testing of fees and expenses disclosed in funds’ prospectuses, SAIs, shareholder reports or other client communications for accuracy and completeness of presentation
  • Review and testing of funds’ performance advertising for accuracy and appropriateness of presentation and applicable disclosures

ACA guidance

The Risk Alert provides a good road map for what the SEC is looking for in their examinations. Now is a good time to review your policies and procedures and ensure that they are consistent with the practices of the firm, and that appropriate updates have been made to the Fund’s policies and procedures as regulations and internal controls have changed. As policies and procedures are updated, ensure that they are consistent with what is being disclosed in fund documents and marketing materials.

How we help

ACA offers objective, innovative, and effective compliance reviews and solutions to assist registered investment companies, as well as their boards, sponsors, advisers, sub-advisers, and service providers comply with SEC regulations. We provide solutions to assist firms with managing and mitigating related operational, regulatory, and reputational risks.

To learn more about the regulatory insights noted above, or the services we offer to help registered investment companies comply with these initiatives, please contact your regular consultant or contact us.