More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
ARTICLE UPDATE: On Aug. 13, both the Wall Street Journal (SEC Launches Examination of Alternative Mutual Funds; subscription required) and Reuters (U.S. SEC to examine alternative mutual funds -WSJ) reported that the SEC has begun its alternative mutual funds sweep. For more on liquid alt funds and what the SEC may be examining, see SEC Focuses on Burgeoning Liquid Alternative Funds Market from the law firm Katten.
The Securities and Exchange Commission will soon begin a national exam sweep of alternative mutual funds, with 15 to 20 fund complexes to be the targets of the first exams that will likely begin in the summer or fall, according to Norm Champ, director of the SEC’s Division of Investment Management.
In a June 30 speech to the Practising Law Institute’s Private Equity Forum, Champ noted that the sweep, to be conducted by the SEC’s Office of Compliance Inspections and Examinations, will focus on liquidity, leverage and board oversight of alternative mutual funds.
“These exams will produce valuable insight into how alternative mutual funds attempt to generate yield and how much risk they undertake, in addition to how well boards are carrying out their oversight duties,” Champ said. “We look forward to their findings.”
As of the end of May, assets in the alternative mutual fund market topped $300 billion, Champ noted. Although alternative mutual funds only accounted for 2.3% of the mutual fund market as of December, the inflows into alt mutual funds in 2013 represented 32.4% of the inflows for the entire mutual fund industry, with almost $95 billion of inflows into alternative mutual funds. “That is over five times more than the amount of inflows into alternative mutual funds in 2012,” Champ said.
Champ also noted the reasons why interest is growing in alternative mutual funds. “We are seeing a growing interest in the retail market for funds that offer distinctive investment returns. Managers of alternative mutual funds are disclosing that they are seeking to pursue investment strategies which are not closely tied to traditional benchmarks or asset classes. These investment strategies, traditionally only accessible to investors in private funds, are now being made more widely available through alternative mutual funds.”
Champ said that one goal of OCIE's alternative mutual fund sweep exams is to ensure that alternative mutual funds are "complying with the ’40 Act." However, he said that the exams "will also allow Commission staff to identify areas where it believes fund managers may need additional guidance."
Andrew Bowden, director of OCIE, told compliance officials during the Investment Adviser Association’s annual compliance conference, held in early March, that OCIE is closely watching advisors’ use of alternative mutual funds.
While there’s “nothing wrong with these strategies” per se, advisors are billing them as “bright, shiny objects,” Bowden said, “but they are a sharp object.”
“The use of market valuation for illiquid securities in an open-ended mutual fund, which requires daily valuation and offers daily liquidity is fraught with risk,” Bowden told compliance officials. “If any of you are considering launching a mutual fund that uses alternative investments or strategies, I implore you to evaluate the reasonableness and the effectiveness of your controls.”
Check out Mutual Funds ‘Vehicle of Choice’ for Alt Investments on ThinkAdvisor.