OCIE Examination Priorities: Takeaways for RICs in 2020

OCIE Examination Priorities: Takeaways for RICs in 2020

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This is part two in a four-part series on the SEC’s examination priorities for 2020. 

In our first article in this series, we discussed the SEC’s examination priorities for 2020 (the Release). In this article, we will dive deeper into how these priorities will impact registered investment companies (RICs).

In general, the 2020 priorities are less detailed than in years past. For example, exchange-traded funds (ETFs) are mentioned, but releases from 2017, 2018 and 2019 were more specific. They highlight issues such as ETFs with little secondary market trading volume and smaller assets under management, suitability of recommendations, unit creation and redemption processes, and allocations to securitized assets.

The SEC’s Share Class Initiative, which launched in 2016, was featured prominently in prior years but is mentioned only briefly in 2020. These releases expressed concerns about different fee structures, recommendations that placed clients in more expensive share classes, disclosures and situations in which advisory personnel are also registered representatives of broker-dealers. Perhaps these issues are largely resolved through exams and recent enforcement? Lastly, historical priorities that applied to RICs included target-date funds, aberrational performance and custom-built indexes, which are absent altogether from the 2020 priorities.

This year’s release includes broader focus areas:

  • Third-Party Sponsored Trusts: This new priority will focus on investment advisers that use third-party administrators to sponsor funds managed by or affiliated with the adviser. Under these third-party sponsored trusts, the trust’s operations, infrastructure and board of trustees are established outside the control of any one adviser, which leverages the trust to create the series fund(s) the adviser will manage. While the examination priority appears to be aimed more at the managing adviser, such third-party sponsored trusts may also be examined as OCIE works with individual advisers on this area.
  • Similarly-Managed Accounts: This recurring priority assesses conflicts of interest and other issues that may arise when advisers manage both private funds and RICs with similar strategies.
  • Never-Before Examined: Advisers continue to be a priority, as has been the case for several years.

The release also highlights matters that may be factored into fund examinations, to the extent applicable:

  • Transition from LIBOR: Since 2017, the industry has been anticipating the end of LIBOR (historically, a widely used reference rate in financial instruments). OCIE will assess firms’ preparations and disclosures regarding their readiness to use an alternative benchmark. The release also highlighted the staff’s concern about how the transition will impact fund investors.
  • Fee Breaks: In keeping with its longstanding interest in fees and expenses generally, OCIE will specifically look at fee discounts that should be provided to investors as a result of policies, contractual or disclosed breakpoints.
  • Digital Assets: OCIE is concerned about digital assets industry wide. Although RICs have not generally invested directly in this asset class, they should be mindful of this priority and prior SEC guidance as digital assets become more institutionalized and adopted more widely.
  • ESG: Environmental, Social, and Governance was the subject of a recent sweep and is now included among the examination priorities. Specifically, examiners will look at how these strategies are marketed and assess compliance with applicable rules and guidance. OCIE is also interested in the accuracy and completeness of disclosures to investors.
  • AML: Unlike private funds, RICs are required to comply with anti-money laundering regulations (AML). OCIE will review AML programs to determine whether they include: appropriate customer identification and due diligence procedures, timely SAR filings, compliance with beneficial ownership requirements, and thorough, independent tests of their AML programs.

Curiously, the Investment Company Act of 1940 liquidity risk management program rule was not among the priorities for RICs. Depending on their size, funds were required to comply with the rule by either December 1, 2018 or June 1, 2019. Given that the rule was adopted in October 2016, funds have been preparing to comply with the rule for several years now and there should be plenty of data to review in an exam. In contrast, the more recently enacted Regulation Best Interest (Reg BI)/Form CRS was included among the priorities. It is possible that examiners will still review compliance with the rule in some exams and/or OCIE will conduct a sweep on the topic. Funds should assume that the issue could arise in an exam; therefore, we do recommend ensuring that your risk management program has been fully implemented and that you assess its efficacy periodically.

Please get in touch with us if you would like to discuss any or all of these priorities with our RIC experts.

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Darren Mooney

Partner and Co-Head of Business Development

Darren Mooney is a Partner and the Co-Head of Business Development at Greyline. Before joining Greyline, Darren served as deputy chief compliance officer of Partner Fund Management where he held primary responsibility for the compliance program of the second-largest hedge fund in the Bay Area. Prior to that, Darren spent five years providing compliance consulting services at Cordium and then ACA Compliance Group, where he led the company’s San Francisco office and west coast operations. In addition to providing ongoing consulting services to a variety of investment managers, including hedge fund, private equity, venture capital, real estate, quantitative and other wealth managers, Darren also regularly guided clients through the SEC registration process, implemented tailored compliance programs, supported clients’ live SEC exams, and served as an SEC-mandated independent compliance consultant following an SEC enforcement action. Darren’s other experience includes serving as deputy chief compliance officer and associate counsel at F-Squared Investments where he directly supported the compliance program during the investigation and subsequent enforcement regarding historical advertising practices. Darren has a B.S. in Economics from the University of Delaware and a J.D. from Suffolk University Law School. He is a member of the Massachusetts bar.

Annie Kong

Partner and Head of Venture Capital
Annie Kong is a Partner and Head of the Venture Capital Division at Greyline. She provides ongoing compliance consulting to investment advisers and manages client relationships. Prior to joining Greyline, Annie was part of compliance and operations at a long-only manager-of-managers that advised pension fund clients. While there, she conducted compliance and operational due diligence on SEC-registered investment advisers on the platform. She also oversaw and counseled on various legal matters across the firm. Annie has a B.A. in Economics from the University of California, San Diego, and a J.D. from the University of San Diego School of Law. She is an active member of the State Bar of California.
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