SEC Releases Risk Alert for Registered Investment Companies

In early November, the Securities and Exchange Commission (SEC) issued a risk alert regarding the examinations of registered investment companies (RICs). The risk alert covers areas related to board oversight of advisory and sub-advisory contracts, compliance programs, disclosure documents, and other matters. The risk alert provides insight into the examination process and outlines some of the documents and information typically requested by Commission staff. The alert sets forth conditions the Commission considers when determining whether to select a fund for examination, these include, “portfolio composition, investment strategies, fee structures, fund performance as compared to similar funds, distribution activities, disclosures, service providers, governance practices, media coverage, and other financial intelligence.”

In the risk alert, Commission staff highlight areas of deficiencies over the past four years related to fund compliance programs, fund disclosures and filings, and fund governance practices. As it relates to fund governance, Commission staff observed four main examples of reoccurring weaknesses:

• Fund board approvals of advisory agreements appeared to be inconsistent with the Investment Company Act and/or the funds’ written compliance procedures
• Fund boards did not receive certain information to effectively oversee fund practices
• Fund boards did not perform their required responsibilities
• Fund board minutes did not fully document board actions

Regarding compliance policies and procedures, the Commission staff noted weaknesses with enforcing stated policies and procedures, examining the effectiveness of policies and procedures, and CCOs that did not provide the required written annual compliance reports to fund boards. Additionally, the Commission noted disclosures contained misleading or inaccurate information, omissions of material fact in sales material, and late fund filings. Included in the document is a table of the types of initial information, including documents that the staff may request and review during a typical fund examination.

Click here to read the SEC risk alert.