SEC Risk Alert: Registered Investment Companies Examination Focus Areas and Document Requests

December 12, 2024

What happened?

On November 4, 2024, the SEC Division of Examinations (the “Division”) published a Risk Alert to describe the examination process for advisers of mutual funds, ETFs, and other registered investment companies (“RICs” or “funds”); the selection and scope of such examinations; and observations on core focus areas for RICs. The alert also shares a list of the typical documents and information requested during such examinations. This is the fifth Risk Alert published in 2024.  All Risk Alerts provide valuable insight into what the SEC staff are observing and their current approach to a particular topic. Advisers to funds can use this Risk Alert to strengthen their compliance program and test current practices.

Selection and Scope of Examinations

When selecting fund advisers for examinations, the Division looks at the fund-specific and adviser-specific risk factors associated with the adviser’s business activities, conflicts of interest, and any regulatory history. Selection is also influenced by external information, such as complaints and referrals from other SEC offices, and internal information, such as regulatory filings and financial intelligence from assessments of strategies, fee structures, performance against similar funds, distribution activities, disclosures, service providers, governance practices, and media coverage, among others.

The scope of examinations focused on RICs could have a limited or thematic scope, but the majority will incorporate three core review areas: fund compliance programs, fund disclosures and regulatory reporting, and fund governance.

Fund Compliance Programs

Deficiencies and weaknesses observed by the SEC staff related to compliance programs included the following:

• Funds failed to perform required oversight, reviews, and assessments stated in their policies and procedures, such as a documented annual review.
• Funds did not adopt, implement, update, and/or enforce policies and procedures, such as policies around custody, fee billing, and liquidity risk management programs.
• Policies and procedures were not tailored or were not consistent with actual practices, such as those applicable to redemption requests or derivative risk management programs.
• Codes of Ethics were not adopted, followed, enforced, or were inadequate, such as instances where funds did not have effective policies or where individuals did not make required reports.
• CCOs did not provide requisite reports to fund boards, including where no CCO was named, or an interim CCO did not prepare necessary reports

Fund Disclosures and Filings

Deficiencies and weaknesses observed by the SEC staff related to fund disclosure issues included the following:

• Incomplete and outdated information or misleading statements in fund registration statements, fact sheets, annual reports, and semi-annual reports, such as omitting information in statements of additional information (“SAI”) or repeatedly exceeding stated asset investment thresholds.
• Untrue statements or omissions of material fact in public sales literature and websites.
• Failure to make fund filings on a timely basis.

Fund Governance Practices

Deficiencies and weaknesses observed by the SEC staff related to fund governance practices included the following:

• Board approvals of advisory agreements failing to follow the Investment Company Act and/or written policies and procedures.
• Fund boards did not receive necessary information to effectively oversee fund practices, such as notifying the board of changes to the fund compliance program or of exceedances of illiquid investment thresholds.
• Failure of fund boards to perform required responsibilities, such as failing to make required determinations or to adopt written policies and procedures tailored to the needs of the funds.
• Failure to memorialize minutes or document board actions as required.

Typical Information Requests For RIC Exams

The Division attached a list of typical information examiners will request of RICs to the Risk Alert. This list provides insight into the likely areas an RIC examination will cover and is a valuable tool for compliance programs at fund advisers. The broad categories of information typically requested include:

1. general information to provide staff with an understanding of the fund’s business and operations;
2. information about the compliance risks that the fund and/or its adviser have identified and the written policies and procedures that have been adopted and implemented to address each of those risks;
3. information to assess board governance processes and the efficacy of board oversight of funds’ compliance programs; and
4. information to facilitate the staff’s own testing for compliance in various areas.

The attachment goes into detail on the specific documents requested, stating that additional or supplemental requests will depend on the exam’s scope and the typical manner of production. The Division points out in the Risk Alert that records that are not maintained electronically or cannot be produced electronically can lead the staff to request advisers to make such records available for in-person examination.

What does this mean for me?

While this alert may not apply to all advisers, it’s always important to monitor what SEC staff are observing and recommending to the industry. As fund advisers look to year-end reviews or prepare for examinations, this Risk Alert is a roadmap of what to expect from the Division.