The SEC Office of Compliance Inspections and Examinations ("OCIE") identified compliance deficiencies and weaknesses observed in recent examinations of registered investment companies.

Problems identified in all types of investment companies included:

  • compliance programs not taking into consideration business activities or risks unique to each fund;
  • failure to enforce existing policies and procedures;
  • insufficient service provider supervision;
  • failing to conduct appropriate annual reviews of the firm's compliance systems;
  • insufficient disclosure involving fees paid to services providers and changes to investment strategies;
  • insufficient review by a fund's independent directors of the fund's contract with its investment adviser; and
  • failure to implement or enforce the fund's code of ethics.

Additional problems identified for money market funds included:

  • insufficient oversight by funds' boards of the investment process and results;
  • poor documentation of credit determinations;
  • insufficient stress testing;
  • failure to appropriate limit investments in retail money market funds to natural persons; and
  • failure to make accurate and timely regulatory filings.

Additional problems identified for target date funds included:

  • poor disclosure; and
  • failure to monitor asset allocation requirements as they changed in accordance with the firm's target date.

Commentary

Steven Lofchie

Problems that OCIE identified involving inadequate review by a fund's board, particularly by its independent directors, are notable. Highlighted problems include the fund's advisory contract and the adviser's investment decisions. Directors must be mindful that they are subject to disciplinary action by the SEC if their oversight is deemed to be insufficient. See, e.g., SEC Charges Gatekeepers of Two Mutual Fund Trusts for Inaccurate Disclosures About Decisions On Behalf of Shareholders. It should be a first priority of fund's compliance and legal staff to remedy any shortcomings in the materials made available to the board for review.

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