Alternative Mutual Fund Exam Sweep

Last month the director of the Securities and Exchange Commission’s (“SEC’s”) Division of Investment Management, Norm Champ, spoke to the Practicing Law Institute’s Private Equity Forum regarding an upcoming national sweep of alternative mutual funds.

It is expected that the examinations will be given to 15 to 20 fund families beginning this summer or fall. The sweep will be conducted by the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) and “will focus on liquidity, leverage and board oversight of alternative mutual funds.”

According to Champ, “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.”

The exams appear to be a result of increased interest from investors in alternative mutual funds who are seeking diversification of investment returns. Champ noted that as of May 2014, alternative mutual funds had over $300 billion in assets. While alternative funds only account for 2.3% of the entire mutual fund marketplace, the inflows in 2013 represented 32.4% of new money flows into the entire mutual fund industry. The alternative investment strategies that were traditionally only accessible to investors in private funds now are more widely available to all investors.

Mr. Champ detailed several observations on how to approach the regulatory issues associated with alternatives, including valuation, liquidity, leverage, and disclosure.

For example, advisors who use alternative mutual funds should consider whether or not the Investment Company has strong valuation policies and procedures in place. On the other hand, Investment Companies should also ensure they maintain a high degree of liquidity to carry out investor redemption requests. Funds should take care in describing the criteria for assessing securities’ liquidity in their written policies and procedures and assess, on an ongoing basis, that they are providing appropriate and useful disclosures to investors.

Core Compliance will continue to report on the sweep examination as information becomes available.

For further information on this and other related subjects, please contact us at (619) 278-0020 to schedule a consultation.

GENERAL DISCLAIMER: Information contained within this blog does not create a business-client relationship, and none of the content of this blog can be deemed to be consultive business advice.




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