Reviews Division Risk Alert Identifies Compliance Issues at Registered Investment Firms


On October 26, 2021, the SEC’s Examinations Division issued a risk alert identifying observations made during a series of reviews focused on industry practice and regulatory compliance for mutual funds and ETFs that can impact retail investors. Staff observations are the result of reviews of over 50 fund complexes spanning over 200 funds or series and nearly 100 investment advisers. Staff have identified gaps or weaknesses in fund compliance programs and monitoring, fund disclosure to investors, and fund governance practices. Based on these observations, staff identified industry practices that the funds may find useful in their compliance programs.
Fund compliance programs. Staff identified the following examples of deficiencies or weaknesses in the compliance programs of funds and their advisers and in the monitoring of those programs:

  • failure to monitor and ensure adequate oversight of portfolio management compliance, including oversight of fund investments;
  • failure to ensure adequate oversight of the valuation of portfolio securities, including the establishment of policies, procedures and controls over the pricing of supplier services;
  • failure to ensure adequate oversight of business practices, including the attribution of trades, prohibited trades and the 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 for reviewing advertisements and marketing literature;
  • failure to establish policies, procedures and processes to monitor and communicate accurate information to fund boards;
  • failure to establish processes governing the annual board review and approval of fund advisory agreements under Section 15 (c) of the Investment Company Act of 1940;
  • failure to complete annual reviews of fund compliance programs and assess the adequacy of OAC annual reports; and
  • failure to adopt or maintain procedures for fund advice on delegated responsibilities.

Fund Information. Staff identified the following examples of deficiencies or weaknesses related to disclosure of funds to investors:

  • information about the funds was inaccurate, incomplete or omitted in the filings, including information relating to changes in investment strategies and potential conflicts of interest; and
  • fund advertising and sales literature presented key information in an inaccurate or incomplete manner or completely omitted key information.

Staff recommendations regarding the compliance program and disclosure practices. In conducting their reviews of funds and their advisers, staff identified several industry practices that may be helpful in developing an effective compliance monitoring program, including the following:

  • review compliance policies and procedures to ensure consistency with fund practices;
  • perform periodic tests and reviews to verify compliance with disclosures and assess the effectiveness of conflict of interest resolution;
  • ensure compliance programs adequately address oversight of third party vendors, including pricing vendors;
  • adopt and implement policies and procedures that ensure compliance with applicable regulations, align with the terms and conditions of applicable exemption orders, and address undisclosed conflicts of interest;
  • provide sufficient and accurate information to the board to enable effective monitoring and evaluation of the funds’ compliance programs;
  • ensure that policies and procedures provide for adequate review and, where appropriate, modification of disclosure in fund reports and communications;
  • modify disclosures to reflect actions taken by the fund boards and update disclosures on the fund website concurrently with new or amended disclosures in fund reports and communications;
  • review and test the accuracy and appropriateness of presentations of fund performance and expenditures in fund reports and communications; and
  • implement processes that assess whether the information provided to the board is accurate, including information relating to fees, expenses and performance, as well as investment strategies and the risks associated with such strategies.

The risk alert is available here.


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