On November 4, 2024, the staff of the SEC’s Division of Examinations issued a risk alert highlighting deficiencies and weaknesses identified in examinations over the past four years in three core areas: fund compliance programs, disclosures and filings, and governance practices.  In addition, as a resource to funds and advisers, the risk alert includes a typical information request list that would be provided as part of the SEC examination process.  The staff noted that it was providing the risk alert to assist funds and their advisers in preparing for an examination.

Examples of deficiencies and weaknesses noted by the staff included:

Compliance Programs

• Funds failing to perform required oversight or reviews or perform required assessments of the effectiveness of their compliance programs;
• CCOs failing to provide written annual compliance reports to fund boards;
• Funds failing to adopt, implement, update and/or enforce policies and procedures, including those related to, among other areas, custody, derivatives and liquidity risk management programs, valuation and portfolio management;
• Policies and procedures that were not tailored to the funds’ business model or were incomplete, inaccurate or inconsistent with actual practices; and
• Funds’ codes of ethics that were not adopted, implemented, followed or enforced, or were otherwise inadequate.

Disclosures and Filings

• Fund registration statements, fact sheets, and annual and semi-annual reports that were incomplete or contained outdated or potentially misleading information, such as disclosures of investment processes that were inconsistent with actual practices;
• Sales literature, including websites, that appeared to contain untrue statements or omissions of material fact, such as funds described as “no-load” that charged such fees and funds mischaracterizing the use of ESG factors in their investment processes; and
• Fund filings that were not made or were not made on a timely basis.

Governance Practices

• Fund board approvals of advisory agreements that appeared to be inconsistent with the Investment Company Act of 1940 and/or the funds’ compliance policies and procedures, including issues such as failing to timely review advisory agreements, failing to request, obtain and consider certain information related to the advisory agreements, and failing to consider material changes to the advisory agreements;
• Fund boards that did not receive information to effectively oversee fund practices, such as information on illiquid investments and changes to funds’ compliance programs;
• Fund boards that did not perform required responsibilities, such as failing to make certain required determinations under the 1940 Act; and
• Fund board minutes that did not fully document board actions, such as the approval of funds’ liquidity risk management programs or the board’s process in approving the advisory agreement.

The risk alert is available here.