SEC Issues Risk Alert Regarding Registered Investment Companies

On Oct. 26, 2021, the Securities and Alternate Fee (SEC) Division of Examinations (“Division”) issued a Risk Alert (“Risk Alert”) by which it recognized observations from examinations underneath its registered funding firm initiative, first introduced in 2018. The Risk Alert summarized examination conclusions from funds within the following six classes, though the employees famous that its observations “can assist all funds in assessing compliance risks”:



index funds that monitor custom-built indexes;



smaller ETFs and/or ETFs with little secondary market buying and selling quantity;



mutual funds with larger allocations to sure securitized investments;



mutual funds with aberrational underperformance relative to their peer teams;



mutual funds managed by advisers which are comparatively new to managing such funds; and



advisers that present recommendation to each mutual funds and personal funds, each of which have comparable methods and/or are managed by the identical portfolio managers.

The Risk Alert divided its key findings into two classes: Compliance and Disclosure.


The primary set of findings centered on the effectiveness of the compliance insurance policies and procedures of the funds and their advisers to deal with sure dangers – significantly within the areas of disclosures, portfolio administration compliance, and conflicts of curiosity – in addition to the oversight of fund compliance applications by fund boards. The Division recognized two most important areas the place compliance points have been weak or poor:

  • funds and advisers that didn’t set up, preserve, replace, comply with and/or appropriately tailor their compliance applications to deal with numerous enterprise practices; and

  • insurance policies and procedures established to make sure board oversight of the compliance applications.

Failures in Compliance Applications

There have been many enterprise practices that went unaddressed or have been inadequately dealt with by the funds and advisers of their compliance applications. A number of of those oversights concerned failures to observe or tackle the precise issues distinctive to their scenario, together with specific points referring to investments and portfolios, valuation, buying and selling practices, conflicts of curiosity, charges and bills, and fund commercials and gross sales literature.

Board Oversight of Compliance Issues

The Division additionally noticed that some examined funds didn’t have applicable insurance policies, procedures, and processes for monitoring and reporting to their boards on sure info. Additionally they discovered that funds didn’t have enough processes for the board to overview and approve the fund’s funding advisory settlement; didn’t have the power to finish annual critiques of the funds’ compliance applications; didn’t make sure that annual reporting from the chief compliance officer addressed the operations of the fund’s adviser; or didn’t undertake or preserve applicable insurance policies and procedures for the funds’ boards to train applicable oversight in sure circumstances.


The disclosure focus recognized a number of inaccurate, incomplete, or omitted disclosures in each fund filings and gross sales literature.

Fund Filings

These points included omissions in funding methods and dangers; potential conflicts with allocating funding alternatives amongst overlapping methods; and adjustments within the indexes used for comparability. Additionally they included inconsistent and inaccurate info relating to the funds’ web belongings and expense info, contractual expense limitations, and working expense calculations. Moreover, the Division famous that there have been usually omissions in disclosure in fund statements of extra info (SAIs) relating to required details about board committees and details about variety of accounts and complete belongings managed by portfolio managers.

Promoting and Gross sales Literature

The Division noticed inaccurate, incomplete, and/or omitted disclosure relating to quite a lot of matters, together with funding methods and portfolio holdings; funding goal variations between predecessor and successor funds; inception dates; fund bills, together with gross and web bills; common complete returns; efficiency info; awards acquired; weighting of index constituents within the benchmark index; variations within the broad primarily based and bespoke indexes used for efficiency comparability; and composition of indexes used for efficiency comparability.

Division Workers Suggestions

The Division advisable that funds and advisers ought to take a number of steps, together with:

  • reviewing compliance insurance policies and procedures for consistency with practices;

  • conducting periodic testing and critiques for compliance with disclosures;

  • making certain that compliance applications adequately tackle the oversight of key distributors; and

  • adopting and implementing insurance policies and procedures to deal with compliance with relevant laws, compliance with phrases and circumstances of relevant exemptive orders, and compliance with points referring to undisclosed conflicts of curiosity.

In a Q&A session earlier than the Investment Firm Institute Securities Legislation Convention on Nov. 1, 2021, Daniel Kahl, performing director of the Division, noticed that funds ought to first “focus on the basics” and are regularly lacking necessary compliance and disclosure points as a consequence of reliance upon very basic, non-applicable insurance policies and disclosures.


The Division’s danger alerts usually function key focal factors in routine and different examinations and are adopted by enforcement proceedings or different hostile actions in opposition to registrants failing to take responsive motion. Subsequently, registered funding corporations and associated advisers ought to overview and revise their compliance and disclosure applications to make sure that such applications are adequately tailor-made for every fund, paying particular consideration to the observations within the Risk Alert.

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