The SEC’s Office of Compliance Inspections and Examinations in a Risk Alert dated April 20, 2015, announced a program targeting investment companies that have never been examined for focused, risk-based compliance examinations. OCIE’s “Never-Before Examined Investment Company” (NBE IC) Initiative, which is part of OCIE’s National Examination Program, will focus on higher-risk areas of concern to the SEC.
The Risk Alert states that the NBE IC Initiative will focus on open-end funds, closed-end funds, and underlying insurance funds, particularly those complexes that launched one or more years ago. Key areas of focus include:
- A fund’s Rule 38a-1 compliance program (and the related Rule 206(4)-7 compliance programs adopted by a fund’s adviser). OCIE likely will focus on:
- proxy voting policies for both portfolio holdings and fund shares;
- timeliness and accuracy of the registration statement and other required filings; and
- codes of ethics
- Annual contract reviews under Section 15(c). The review of advisory and sub-advisory contracts will assess:
- the adequacy of the board’s determination that fees are fair and reasonable (see our related blog post); and
- how the adviser manages conflicts of interest with respect to a fund and the fees received from that fund.
- Advertising and distribution. OCIE is perennially interested in this subject, and the NBE IC initiative will include a review of advertisements and distribution policies to ensure that:
- Advisers have established a process in place to review and approve advertisements;
- Funds have established adequate procedures to ensure that shareholders receive disclosed breakpoints.
- Valuation and NAV calculation. OCIE staff notes that funds are required to calculate their NAV daily, and that such calculation is driven by the valuation of portfolio assets. OCIE staff intends to review policies and procedures related to valuation and the calculation of NAV and, importantly, a fund board’s processes for overseeing the valuation of portfolio holdings.
- Leverage and derivatives. Although much about the SEC’s views on investment company use of derivatives and leverage is in a state of flux, OCIE continues to focus on these areas as a priority in examinations. Accordingly, funds should be prepared to provide information related to:
- compliance with the asset coverage requirements of Section 18;
- policies for segregating assets to cover exposure; and
- adequacy of registration disclosures concerning use of derivatives, leverage, and related risks.
OCIE effectively has delivered NBE ICs a syllabus for their upcoming exams. Registered funds that have not yet been examined by OCIE staff should carefully review the Alert and update their policies and procedures in anticipation of an imminent compliance exam.