SEC Retail Investor Focus Turns Towards Registered Investment Companies

Earlier this year when the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its 2018 examination priorities, OCIE stated that a core priority was to protect retail investors, including seniors and individuals saving for retirement. OCIE is now continuing this effort by focusing on mutual funds and exchanged-traded funds (together, the “Funds”) as the vehicles in which retail investors invest.

In a Risk Alert issued by OCIE on Nov. 8, the office announced that it is initiating a series of examinations focused on Funds. The goal of the examinations is to “assess industry practices and regulatory compliance in certain areas that may have an impact on retail investors.” The examinations, however, are not limited to just Funds; OCIE may also evaluate advisers and sub-advisers (collectively, “Advisers”) to Funds and review the oversight of a Fund’s Board. OCIE stated that Funds, Boards and Advisers in the following categories will be the subject of its reviews:

  • Index funds that track custom-built indices
  • Smaller ETFs and/or ETFs with little secondary market trading volume
  • Mutual funds with higher allocations to certain securitized assets
  • Funds with aberrational underperformance relative to their peer groups
  • Advisers relatively new to managing mutual funds
  • Advisers who provide advice to both mutual funds and private funds that have similar strategies and/or are managed by the same portfolio managers (side-by-side management).

Further, OCIE provided additional guidance as to the scope of its reviews for each of the above-categories in the Risk Alert. The additional guidance focuses on Fund and Adviser policies and procedures specific to each category and provides a roadmap for policy considerations and reviewing controls. The guidance also identifies certain elements of each category that pose unique risk and/or conflicts and Board oversight expectations.

What does this mean for Funds, Boards and Advisers? Funds and Boards should review their policies, procedures and disclosures and those of a Fund’s service providers to confirm that they are designed to address risks and conflicts, that appropriate controls have been implemented, that such controls are operating as intended and that disclosures clearly state risks and conflicts. Additionally, Funds’ Boards should assess the reports they receive to verify that they have sufficient information to oversee the Funds’ operations.

CSS/Ascendant Compliance Management can assist Funds, Board and Advisers by conducting independent assessments of the focus areas that OCIE has identified. Contact us to tailor an engagement designed to fit your needs and those of your Funds.

Post written by Allison Fraser

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