Top Compliance Observations of Investment Companies From OCIE’s MMF and Target Date Fund Initiatives

The Office of Compliance Inspections and Examinations (OCIE) has issued a Risk Alert providing investment companies, investors, among others, information on the most cited deficiencies found in 300 fund exams of registered investment companies. The Risk Alert also includes observations from national examination initiatives focused on money market and target date funds. While many of the funds weren’t cited for all the deficiencies referenced, the most noted weaknesses concerned:

The Fund Compliance Rule. Staff observed funds’ failures to adopt and implement policies and procedures reasonably designed to prevent violations of the federal securities laws, including policies and procedures “that provide for the oversight of compliance for each investment adviser, principal underwriter, administrator, and transfer agent of the fund (collectively, “service providers”).” Observations included:

● Compliance programs that did not take into account the nature of funds’ business activities; didn’t consider specific risks, method of pricing of securities; advertisements and sales literature problems; 
● Policies and procedures not followed or enforced i.e. funds’ policies and procedures related to the fair valuations determined by the valuation committee where certain funds failed to follow or enforce policies and procedures; 

● Inadequate service provider oversight i.e. failure to provide  ongoing monitoring or due diligence of providers’ services relating to pricing of portfolio securities and fund shares; 
● Annual reviews either not performed or did not addressed the adequacy of the funds’ policies and procedures; Certain funds conducted annual reviews of their policies and procedures that failed to address the adequacy of the funds’ policies and procedures;

Disclosure to Investors. Staff observed funds that provided incomplete or potentially materially misleading information in their prospectuses, statements of information, or shareholder reports when compared to the funds’ actual activities that the staff observed during examinations (i.e. service provider fees, change in investment strategy). 

Section 15(c) Process. Staff observed some funds’ failure to request and evaluate information reasonably necessary for the board to evaluate the terms of the adviser’s contract, including shareholder reports that failed to discuss adequately the material factors that informed the board’s approval of an advisory contract; failure to implement, follow or enforce code of ethics, or failed to comply with their own approval and reporting obligations.  

Certain National Examination Initiatives – Money Market Funds (MMFs) and Target Date Funds (TDFs)

As for observations from the national examination initiatives focused on money market funds and target date funds, the staff observed instances of deficiencies or weaknesses related to MMFs’ portfolio management practices, compliance programs, and disclosures. 

In examining over 30 TDFs, including both “to” and “through” funds, the staff observed instances of deficiencies or weaknesses related to TDFs’ disclosures and compliance programs, including:(i) incomplete and potentially misleading disclosures in  prospectuses and advertisements; and (ii) incomplete or missing policies and procedures related to monitoring asset allocations, advertising and sales literature, and glide path deviations.

A copy of the Risk Alert can be found here

 

Author: Dexter Johnson

The author is a an attorney who for the past 14 years has concentrated his practice in representing, successfully, investment advisers, broker-dealers, corporations and individuals who are subject to SEC, FINRA, State or other regulations and who may be the subject of regulatory examination, review or investigation. He formerly worked at the SEC. His regulatory and litigation experience has encompassed virtually every type of securities issue in the industry. He has also negotiated favorable outcomes in many of these matters for his clients.