ICI Issues Guidance on Conducting Annual Reviews
The Investment Company Institute last week issued a 21-page report designed to assist mutual funds in complying with the fund compliance program ruleís annual review and board report requirements.
The report will be helpful to CCOs of all stripes ó including those at stand-alone advisers that have nothing to do with mutual funds. However, the ICI is providing the report only to ICI members (the ICI provided IM Insight with a review copy).
The report picks up where the SECís guidance left off. Among other things, it acknowledges that a CCOís direct involvement in the annual review process will depend on factors such as the size and complexity of the firm. In larger organizations, noted the report, the CCO may not be involved in direct testing, and instead may focus primarily on planning and coordinating the review process and reviewing tests and analyses performed by others.
The report suggests that CCOs consider drawing up an annual review "plan" to map out the scope and focus of the annual review, how various areas will be reviewed, and what resources are available to conduct various reviews. The plan can identify the firmís particular compliance risks, as well as reviews that are already being performed and reports that are already being generated.
The report discusses a variety of testing options, such as:
interviews of specific individuals;
observing first-hand how specific policies and procedures are being implemented within the firm;
transactional testing (the report describes initial testing as well as retesting of data tested by others);
trend analysis (namely, reviewing data or reports over time "to identify whether there is an increase or decrease in a selected occurrence"); and
reports ó both internal (periodic compliance reports, management reports, special purpose reports, exception reports, reconciliation reports, and internal audit reports) and external (reports prepared by third-party experts such as attorneys or consultants, service provider reports, and attestation reports), as well as internal compliance certifications.
The paper notes that CCOs may need to evaluate past assessments to determine whether more current assessments should be performed. Changes made to procedures, operations, personnel, or applicable regulations, or the occurrence of a compliance event, may weigh towards performing an additional assessment of the area, it suggests.
The paper also discusses the content of the CCOís annual review report. It notes that a summary of the fundís compliance oversight program may be helpful. It also points out that the fund compliance ruleís definition of material compliance matter "would seem to suggest that annual reports are not required to include each and every possible violation, mistake, error, weakness, or deviation in connection with the fundís and its service providersí policies and procedures." When describing a material compliance matter to the board, a fund CCO may find that a "concise, understandable description" of the matter and the manner in which it has been addressed may be useful, said the report. It pointed out that the board may request additional follow-up information, if appropriate.
Like advisers, funds must complete their initial annual review no later than April 5, 2006. Unlike advisers, however, fund CCOs must additionally provide a written annual review report to the fund board within 60 days of completing the annual review.