Top exam officials at the Securities and Exchange Commission ticked off for compliance officers the hot-button issues on their radar this year.
Andrew Bowden, director of the SEC’s Office of Compliance Inspections and Examinations, told compliance officials during the Investment Adviser Association’s annual compliance conference, held Thursday and Friday in Arlington, Va., that OCIE is closely watching advisors’ use of alternative mutual funds.
One of the fastest growing new fund sectors, alt mutual funds have seen a 63% rise in assets, with total assets now standing at $258 billion, Bowden said. By 2022, he said, 20% of fund assets will be in these funds.
While there’s “nothing wrong with these strategies” per se, advisors are billing them as “bright, shiny objects,” he 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.”
In short, he said, “daily valuation and daily liquidity require control and discipline.”
Both Bowden and Jane Jarcho also noted the agency’s focus on wrap fee arrangements (specifically reverse churning). The agency, Jarcho said, is looking to see if these arrangements are being “abused,” and is “focused on fiduciary duties” associated with these products and whether they are suitable for clients. “Advisors need to take action if the wrap fee is no longer appropriate,” she said.
Jarcho also said that OCIE is currently devising an approach to assess advisory firms’ cybersecurity policies and procedures. She said the agency will assess “the level of preparedness and experiences” that firms have had with cybersecurity threats. Actual exams in this area haven’t commenced as of yet, she said, and “firms aren’t supposed to follow any cybersecurity policies per se.”