Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News March 21, 2005 Issue

'Technical Compliance' Among OCIE's Areas of Focus

With all this talk of "risk assessment" and developing a "culture of compliance," don’t forget to go back and actually read the rules from time to time.

At the SEC Speaks conference earlier this month, OCIE officials listed "technical compliance" as an important area of focus in fund and adviser exams. One OCIE official described this as "trying to get back to the nuts and bolts of compliance." Examiners have found that some mutual fund complexes and their advisers have a "general lack of knowledge" regarding the application of the Investment Company Act to specific investments, said the official. Similarly, examiners have found that some industry participants are not aware that certain operational practices give rise to requirements under the Act. One example: some mutual funds have not realized that their investments in ETFs, as well as in other investment companies (both registered and unregistered), are subject to ICA Section 12(d)1.

Here’s perhaps another example of a "technical" compliance issue: the SEC’s September 2004 settlement with Bridgeway Funds and founder John Montgomery for incorrectly calculating performance fees. Although IAA Rule 205-2(b) requires fees to be calculated a certain way, Bridgeway followed a different methodology (which it took pains to accurately disclose to shareholders). Nonetheless, the rule said what it said, and Bridgeway and Montgomery ended up settling to the tune of $250,000. "Bridgeway Capital Management, and I, specifically, should have sought specialized legal counsel on this issue long ago," said Montgomery in a letter to shareholders discussing the settlement.

The upshot: don’t forget about those nuts and bolts.

Other current areas of focus in fund and adviser examinations, as described by OCIE officials at SEC Speaks:

  • market timing and late trading;
  • undisclosed payments to obtain business;
  • revenue sharing;
  • soft dollars;
  • portfolio valuation;
  • personal trading;
  • allocation of investments; and
  • forensic test measures.

The top 5 deficiencies spotted in investment adviser examinations conducted in 2004:

  1. information disclosures, reporting, and filing – 63% of exams had this deficiency
  2. information processing and protection – 33%
  3. performance advertising and marketing – 31%
  4. personal trading – 31%
  5. brokerage arrangements and execution – 27%

The top 5 deficiencies spotted in fund examinations conducted in 2004:

  1. performance advertising and distribution of fund shares - 23% of exams had this deficiency
  2. information disclosures, reporting, and filing – 14%
  3. corporate governance – 14%
  4. pricing of fund assets and calculation of NAV – 12%
  5. personal trading – 8%.