The Securities and Exchange Commission recently released its July 2008 ComplianceAlert identifying common strengths and weaknesses found by SEC examiners (Staff) during compliance examinations of SEC-registered investment advisers, investment companies, broker-dealers and other types of registered firms. For a discussion of the compliance issues noted in examinations of registered broker-dealers, see the Broker Dealer section above.
With respect to investment advisers, the Staff focused on personal trading by access persons, proxy voting and soft dollar practices. In the area of personal trading, the Staff identified several common deficiencies, including:
- Maintaining an incomplete code of ethics (e.g., failing to require access persons to obtain pre-clearance before investing in limited investment opportunities); and
- Failing to adhere to code of ethics procedures (e.g., trading in securities posted to the restricted list and failing to monitor personal securities trading reports).
In the area of proxy voting, the Staff noted that some investment advisers had not documented adequately their assessment of third party proxy voting services, preventing the Staff from assessing the adequacy of conflict of interest disclosures.
The Staff also examined the soft dollar arrangements of investment advisers including the frequency of such arrangements, policies and procedures in place to satisfy best execution, and the adequacy of disclosure. Of particular interest to the Staff were situations in which an adviser (i) fails to evaluate the value of research received through the use of soft dollar credits, particularly when the commissions are higher than expected for the type of instrument traded or (ii) accumulates large soft dollar credit balances that might raise concerns about the reasonableness of the commissions.
Regarding investment companies, the Staff focused on valuation and liquidity issues in high yield municipal bond funds. Specifically, the Staff noted concerns in overvaluation of illiquid securities and inadequate disclosure of valuation risk.
The ComplianceAlert includes a list of internal compliance controls too numerous to report here that “appeared to be effective” in assisting in preventing violations of the Advisers Act.