November 12, 2024
Who may be interested: Registered Investment Companies; Advisers to Registered Investment Companies; Compliance Officers; Board of Directors
Quick Take: The SEC staff (Staff) published a risk alert (Alert) summarizing deficiencies observed in recent fund examinations and providing information about the examination process, including categories of inquiry and the types of documents and information typically requested by the Staff in an exam. The Alert addresses, among other things, the following: how the Staff selects registered investment companies for exams; areas for review during an exam; and Staff observations about weaknesses related to fund compliance programs, disclosures and filings, and governance practices.
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Examination Selection and Scope
The Staff provided insight into the selection and scoping process for fund exams. The Staff considers many factors, including:
The Staff said their risk assessment and scope of the exam is based on ownership structure, business models, affiliations, applicable business practices, conflicts, and higher-risk activities. Fund exams typically include three core areas, which are compliance programs, fund governance, and disclosure and regulatory filings.
The Staff highlighted some areas ripe for examination in funds:
Staff Observations from Examinations
The Alert describes deficiencies and weaknesses observed by the Staff over the most recent four-year period. The Staff noted that compliance program deficiencies covered a wide range of topics, including custody, fee billing, derivatives and liquidity risk management programs, valuation portfolio management, trade allocation and errors, distribution, affiliated transactions, and brokerage execution. Deficiencies included:
Fund Compliance Programs:
Fund Disclosures and Filings:
Fund Governance Practices:
Typical Information Request
Lastly, the Alert indicates what is typically included in the Staff’s initial request prior to conducting an examination, including:
For more detailed information, the published Alert can be found here. Additionally, a prior Seward and Kissel blog post on the 2025 SEC Examination Priorities can be found here.
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The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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