Last week, the Office of Compliance Inspections and Examinations (OCIE) announced new targeted exams of registered investment companies and advisers with specific types of investment activity. Specifically, exams will cover the following types of funds and activities:
- Index funds with custom indices
- Small ETFs and ETFs with limited trading volume
- Mutual funds investing in securitized assets
- Funds with poor performance relative to peers
- Advisers new to fund management
- Advisers managing both mutual funds and private funds side-by-side
The National Exam Program Risk Alert (“the Alert”) issued on November 8, 2018, foretells a series of targeted exams (formerly referred to by Staff as “sweeps”) that focus on certain criteria as identified above. The Alert seems to indicate that that these exams are imminent or already underway.
According to the Alert, OCIE is interested in determining whether the targeted firms have adequately addressed several key risk areas, such as:
- Conflicts of interest
- Fund board oversight of the compliance program
- Disclosures to fund investors regarding risks and conflicts
- Practices and controls around portfolio management and fund governance
- Adherence to investment objectives and restrictions
- Allocations of investment opportunities
- Use of leverage in funds
- Valuation and pricing
- Controls regarding use of brokers, best execution, and trade allocations
- Allocations of fees and expenses
- Marketing and distribution of funds
The Alert is unusual in two ways. First, it announces a targeted program at the outset of the exams as opposed to after the conclusion of the exams. In the past, OCIE has waited to announce the outcome of targeted programs. Second, it makes very clear that the Staff has an expectation that funds and advisers have strong internal controls and practices to oversee the portfolio management of funds. This message serves as a “heads up” to the fund industry that compliance, portfolio management, operations, and Board members must all be involved in portfolio oversight which is a critical part of a fund compliance program.
Firms with business lines and activities as identified in the Alert should prepare now for possible inclusion in the targeted exam program.
View National Exam Program Risk Alert, “Risk-Based Examination Initiatives Focused on Registered Investment Companies,” November 8, 2018.