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SEC Finds Pervasive Regulatory Failures by Registered Funds and Boards

 

The SEC’s Office of Compliance Inspections and Examinations (OCIE) has warned the registered fund industry about rampant regulatory violations involving compliance programs, disclosure, advisory contract approvals, and Codes of Ethics.  In a recent Risk Alert detailing common deficiencies and weaknesses uncovered during 300 examinations over the last two years, OCIE chided the industry for weak compliance programs including policies and procedures that failed to prevent violations of investment guidelines or to ensure fulsome disclosure in fund marketing materials; breakdowns in providing the Board with adequate fair valuation information and broker quotes; weak service provider and subadviser oversight; and inadequate annual reviews.  OCIE also criticized the information used to approve advisory contracts as well as shareholder disclosure in offering documents.  OCIE also warned that funds need to enhance their Codes of Ethics including reporting and how to define “access persons.”

Hire better service providers.  Not every lawyer knows the Investment Company Act Board approval, disclosure, and reporting rules.  Not every compliance person understands Rule 38a-1 and how to implement fund procedures and testing.  Not all administrator/distributors understand the differences between private funds and registered funds.  You wouldn’t hire a neurologist to perform surgery.  You shouldn’t hire just any lawyer or compliance consultant to implement your registered fund regulatory program.