The SEC continues to be focused on the fund industry, with alternative mutual funds now a priority. Alternative funds rely on innovation and creative thinking within the very traditional mutual fund framework. According to the SEC, alt funds represented 32.4% of all fund inflows during 2013, a five-fold increase over 2012 numbers. Big numbers like that attract the attention of OCIE, which has launched a summer “sweep” of alt funds.
In a recent speech by Norm Champ, Director of the Division of Investment Management (IM), the SEC categorizes alternative funds into three basic camps:
- Non-traditional asset class funds (i.e., currencies)
- Non-traditional strategies (i.e., long/short)
- Illiquid asset funds (i.e., private debt)
During its sweep examinations, OCIE will focus on the following areas:
- Valuation of investments
- Fund liquidity
- Use of leverage
- Prospectus/SAI disclosures
- Board oversight
While beginning this summer, the sweep will most likely run into the next fiscal year. OCIE plans to visit at least 20 firms to gather facts on how these funds manage to abide by the Investment Company Act (IC Act) requirements and also offer strong alpha with low beta. Alt funds should prepare for exams by ensuring adequate policies are in place that meet IC Act requirements and cover the sweep target areas. If recent history repeats itself, IM should issue new guidance once the sweep concludes.