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SEC Announces 2013 Exam Priorities, Role of Fund Boards Included

The SEC Office of Compliance Inspection and Examinations (OCIE) has released its examination priorities for 2013.  The following priorities involve the role of the fund board and should be of particular interest to fund directors:                                                                                       

  • Fund Governance, Generally – “Fund governance and assessing the “tone at the top” is a key component in assessing risk during any investment company examination. The staff will confirm that advisers are making full and accurate disclosures to fund boards and that fund directors are conducting reasonable reviews of such information in connection with contract approvals, oversight of service providers, valuation of fund assets, and assessment of expenses or viability.”

  • Alternative Investment Strategies --  The examination program is focusing “on the growing use of alternative and hedge fund investment strategies in open-end funds, [ETFs], and variable annuity structures. More specifically, the staff will assess whether: (i) leverage, liquidity and valuation policies and practices comply with regulations; (ii) boards, compliance personnel, and back-offices are staffed, funded, and empowered to handle the new strategies; and (iii) the funds are being marketed to investors in compliance with regulations.”

  • Payments for Distribution in Guise -- The examination program “is focusing on the wide variety of payments made by advisers and funds to distributors and intermediaries, the adequacy of disclosure made to fund boards about these payments, and boards’ oversight of the same. These payments go by many names and are purportedly made for a variety of services, most commonly revenue sharing, sub-TA, shareholder servicing, and conference support. The staff will assess whether such payments are made in compliance with regulations, including Investment Company Act Rule 12b-1, or whether they are instead payments for distribution and preferential treatment.”

 
 
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