The SEC Division of Investment Management’s Disclosure Review and Accounting Office has warned the fund industry to improve its fee and performance disclosure. In its most recent release, the DRAO highlighted “several issues” including failures to verify the accuracy of performance and fee information. In particular, the DRAO cites multiple funds that have failed to reflect the effect of sales loads in their average annual returns table, showing negative performance as positive performance, and transposing the performance of different fund classes and benchmarks. The DRAO also faults fund-of-funds for failing to show the expenses of underlying acquired funds. Funds also routinely make arithmetic errors and fail to properly use XBRL tags. The DRAO “encourage[s] funds to closely review their performance and fee disclosures prior to providing them to investors.”
Over the years, many fund firms have delegated the preparation of registration statements to low-cost service providers that may not have the necessary knowledge, staffing and/or systems to prepare correct filings. When hiring a vendor (administrator, lawyer, auditor), make sure that the firm has the experience and the resources to do your job right. The cheapest is never the best and could cost you in the long run with a rescission or enforcement order.