SEC Observations Following Reviews of Registered Investment Firm Initiatives


On October 26, 2021, the Examinations Division of the Securities and Exchange Commission (SEC) (the “Division”) issued a Risk Alert (“Risk Alert”) in which it identified the observations of the examinations in connection with its registered investment firm initiative, first announced in 2018. The Risk Alert summarized the fund review findings in the following six categories, although staff noted that their observations “may help all funds to assess the risks of non-compliance ”:


index funds that track personalized indices;


Smaller ETFs and / or ETFs with low trading volume in the secondary market;


mutual funds with higher allocations to certain securitized investments;


mutual funds showing an aberrant underperformance compared to their peer groups;


mutual funds managed by advisors who are relatively new to the management of these funds; and


advisors who advise both mutual funds and private funds, both of which have similar strategies and / or are managed by the same portfolio managers.

The Risk Alert has divided its main findings into two categories: Compliance and Disclosure.


The first set of findings focused on the effectiveness of the compliance policies and procedures of funds and their advisers in dealing with certain risks – particularly in the areas of disclosure, portfolio management compliance, and conflict of interest. ‘interests – as well as monitoring of program fund compliance by fund boards. The Division identified two main areas where compliance issues were low or deficient:

  • funds and advisers who have not established, maintained, updated, monitored and / or appropriately adapted their compliance programs to respond to various business practices; and

  • policies and procedures established for the board’s oversight of compliance programs.

Failures of compliance programs

Many business practices have not been corrected or have been mismanaged by funds and advisers as part of their compliance programs. Many of these oversights involved failures to monitor or address specific issues unique to their situation, including particular issues related to investments and portfolios, valuation, trading practices, conflicts of interest, fees, and expenses, fund advertisements and sales literature.

Board oversight of compliance issues

The Division also observed that some funds reviewed did not have appropriate policies, procedures and processes to monitor and report to their boards of directors on certain information. They also found that the funds did not have adequate processes for the board to review and approve the fund’s investment advisory agreement; lacked the capacity to conduct annual reviews of fund compliance programs; failed to ensure that the annual report of the Chief Compliance Officer addressed the operations of the Fund Advisor; or has not adopted or maintained appropriate policies and procedures enabling the boards of directors of the funds to exercise appropriate supervision in certain circumstances.


The focus on disclosure has identified several inaccurate, incomplete or omitted disclosures in fund records and sales literature.

Deposits of funds

These issues included omissions in investment strategies and risks; potential conflicts with the allocation of investment opportunities among overlapping strategies; and changes in the indices used for the comparison. They also included inconsistent and inaccurate information regarding fund net assets and expenses, contractual expense limits and operating expense calculations. In addition, the Division noted that there were often omissions in the disclosure in Supplementary Information Fund (SAI) statements regarding information required on board committees and information on the number of accounts and the total. assets managed by portfolio managers.

Advertising and commercial literature

The Division observed inaccurate, incomplete and / or omitted information on a number of topics, including investment strategies and portfolio holdings; differences in investment objectives between predecessor and successor funds; dates of creation; expenses of the fund, including gross and net expenses; average total returns; performance information; awards received; weighting of index components in the benchmark; the differences between the general and tailor-made indices used for the performance comparison; and the composition of the indices used for the performance comparison.

Division staff recommendations

The Division recommended that the funds and advisers take several actions, including:

  • review compliance policies and procedures to ensure consistency with practices;

  • perform periodic tests and reviews to verify compliance with disclosures;

  • ensure compliance programs adequately address oversight of major suppliers; and

  • adopt and implement policies and procedures to ensure compliance with applicable regulations, compliance with the terms and conditions of applicable exemption orders and compliance with matters relating to undisclosed conflicts of interest.

In a question-and-answer session ahead of the Investment Company Institute’s Securities Law Conference on November 1, 2021, Daniel Kahl, Acting Director of the Division, noted that funds should first “ focus on the basics ”and frequently miss significant compliance and disclosure issues due to relying on very general and non-enforceable policies and disclosures.


Division risk alerts often serve as key focal points in routine and other reviews and are followed by enforcement proceedings or other adverse actions against unresponsive reporters. Therefore, registered investment firms and associate advisers should review and revise their compliance and disclosure programs to ensure that these programs are suitably tailored to each fund, paying particular attention to the observations of the risk alert.

© 2021 Greenberg Traurig, LLP. All rights reserved. Revue nationale de droit, volume XI, number 307

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