On November 7, 2019, the Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert (the “Alert”) on findings from fund examinations. The Alert covered findings from routine fund exams as well as recent targeted exams of money market funds (Money Market Fund Initiative) and target date funds (Target Date Fund Initiative). The data for the Alert came from close to 300 examinations over a two year period. The Alert covered many broad categories of findings as tracked by OCIE.
Overall findings were in relation to the Compliance Rule, Rule 38a-1. The most common findings included:
- Compliance programs that were not structured for the specific type of fund business
- Procedures that were not followed or enforced internally
- Lack of fund service provider oversight
- Inadequate Annual Compliance Reviews
- Misleading or inaccurate shareholder disclosures in prospectuses, SAIs, or shareholder reports
Certain findings were specific to the Section 15(c) process for the approval of the investment adviser or principal underwriter to the fund:
- Lack of meaningful data provided to the Board
- Inadequate discussions noted in the Board Minutes, or lack thereof
Fund Code of Ethics (COE) under Rule 17j-1 were also often cited as deficiencies:
- Failure to implement the COE
- Failure to follow or enforce the COE
- Lack of COE approval by the Board
The Staff did not comment on how many of the funds reviewed had outsourced CCOs instead of in-house CCOs. However, many of the findings above would be more typical of those utilizing an outsourced CCO, where lack of specificity and direct internal oversight may be an issue.
The Money Market Fund Initiative discovered several problems with funds complying with the most recent changes to Rule 2a-7. Over 70 money market funds were examined as part of the initiative. Findings included:
- Improperly identified or lack of ongoing monitoring for eligible securities
- Stress tests that were inadequate or not described sufficiently to the Board to meet the grounds for the required summary of significant assumptions
- Written policies and procedures that were not specific enough to show compliance with the changes to Rule 2a-7
- Websites that lacked the proper Rule 2a-7 disclosures and marketing materials without required legends
The Target Date Fund Initiative included more than 30 funds of both “to” and “through” funds (funds managed to a target date and funds managed through or past a target date). Findings were mainly around disclosures and included:
- Incongruent disclosures in prospectuses v. marketing materials
- Issues with glide path changes and how they were disclosed in relation to asset allocations
- Conflicts of interest with affiliated funds or investment advisers
- Weak written policies and procedures regarding monitoring of asset allocations, glide path changes, advertising and marketing material review and oversight
