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5/14/15 - SEC Announces Never-Before-Examined Registered Investment Company Initiative

On April 20, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations announced its plans to examine some investment companies that it has not previously inspected. The Never-Before-Examined Registered Investment Company Initiative will focus on open-end funds, closed-end funds, and underlying insurance funds, with an emphasis on investment-company complexes that have been operational for more than one year. The program — which is part of OCIE’s broader National Examination Program and consistent with the SEC’s Examination Priorities for 2015 — will focus on certain “higher-risk areas” for the selected funds. These areas include: 

  • Compliance programs for proxy voting, timeliness and accuracy of regulatory filings, and codes of ethics
  • Annual contract review, including the board’s basis for determining whether the advisory fee is fair and reasonable, and the management of any adviser conflicts of interest
  • Advertising and distribution practices, including controls and procedures related to the application of breakpoints
  • Policies relating to the valuation of holdings and net-asset-value calculation methodology, as well as the board’s processes for valuation oversight
  • Leverage and the use of derivatives, including compliance with rules and guidance governing asset coverage and segregation, and appropriate disclosure

The SEC also said examiners may select additional topics based on risks identified during examinations.

The NBE IC Initiative follows a similar program OCIE launched in 2014 that also focused on “higher-risk areas” of business and operations, including compliance programs, disclosures, marketing materials, portfolio management, and the safeguarding of client assets.

In light of the SEC’s announcement and the agency’s recent efforts to increase the number of firms it inspects, registered investment companies that have not yet been examined by OCIE should review their policies and procedures and prepare for examination.

Contact Promontory

Promontory helps regulated entities, including investment companies and investment advisers, understand their compliance obligations. We would be happy to discuss any questions you may have about the SEC’s initiative and how registrants should prepare for potential examinations and regulatory changes. For more information, please contact:

Conway Dodge
Managing Director, Washington, D.C.
+1 202 370 0461

Michael Sullivan
Director, Washington, D.C.
+1 202 384 3508