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Fund’s Trustees and Administrator Faulted for Inadequate Compliance Program

A mutual fund’s compliance program violated the fund compliance rule (38a-1) because the trustees did not receive adequate summaries of the advisers’ compliance program as part of a series trust structure.  According to the SEC, the respondent, the fund administrator’s compliance services affiliate, represented to the Board of Trustees that each adviser’s compliance program was “sufficient and in use” and that the code of ethics and proxy voting policies were “compliant.”  The SEC charges that these summary representations did not satisfy Rule 38a-1(a)(2) which requires the board to make an initial determination that each fund service provider’s policies and procedures are reasonably designed to comply with the securities laws.  The SEC asserts that the respondent should have presented the Board with the advisers’ compliance manuals or summaries of “the salient features of the advisers’ compliance programs and that provided the Trustees sufficient understanding of how the programs addressed particularly significant risks.”  Separately, the SEC also took action against the fund directors for approving boilerplate Board minutes and shareholder disclosure that did not reflect the Board’s activities when reviewing advisory contracts. 
OUR TAKE: Compliance personnel for fund trusts with multiple advisers and sub-advisers should consider how to present the due diligence of the advisers’ compliance programs.  Delivering the full compliance manuals may avoid liability, but it may not help trustees in their decision-making process.  Still open is how extensive a summary must be to qualify as adequate.  Perhaps, compliance personnel should deliver both the summary and full manual.  Regardless, this action increases liability for fund directors and fund service providers.  

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