Episode 43: Key Considerations for Investment Advisers Regarding Risk Alerts and Mutual Funds

On episode 43 of the CCO Buzz we have Lead Senior Compliance Consultant Tina Mitchell. She’s here to discuss key considerations for Investment Advisers of Mutual Funds.

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CCO Buzz: Good morning and welcome back. Have you missed us? We apologize for the extended hiatus, but we needed to reenergize and get some great topics lined up for our listeners. This week to kick off episode 43, we have Tina Mitchell. She’s back to discuss the intricacies of Mutual Funds.

Tina, I believe the SEC issued a Risk Alert recently pertaining to exams of mutual funds. Is that correct?

Tina Mitchell: Yes. Actually, in November 2018, the SEC published a Risk Alert that’s titled “Risk-Based Examination Initiatives Focused on Registered Investment Companies.” And the reason I’m reading the title, is because if you go by title alone, it’s really easy to assume that the SEC will be examining only mutual fund companies. However, that actual assumption would be an incorrect, because if you look into that Risk Alert, part of the exam initiative, the SEC is also examining advisers that are new to managing mutual funds and those that manage both mutual funds and private funds.

CCO Buzz: What does that mean?

Tina Mitchell: More and more investment advisers are deciding to mange the portfolios of unaffiliated mutual funds – and they are even creating proprietary mutual funds through outsourced turnkey solutions that already have an established trust. What it means for these advisers is that the SEC will be examining the adviser and the services provided to the mutual fund by the adviser.

CCO Buzz: Tina, can you provide some guidance on the compliance and regulatory requirements for advisers that manage mutual funds?

Tina Mitchell:  Yea, I think the most important thing for advisers to know is that, as manager to a mutual fund, they are required to follow a number of regulations under the Investment Company Act of 1940, which is a different regulation than the Investment Advisers Act of 1940.

I’ll give you an example, under Section 17 of the 40 Act, there’s a number of prohibitions surrounding transactions involving affiliates. That term not only includes affiliates of the adviser, but also affiliates of the mutual fund and the mutual fund’s service providers.

Like most regulations that contain prohibitions, these rules do have certain exemptions; but they usually require the firm to have robust policies and procedures in place and require detailed reporting to the mutual fund Board (of Trustees).

So, advisers that manage mutual funds also need to review the Compliance Policies and Procedures of the mutual fund, since they usually delegate a variety of processes to be performed by the Adviser and also outline what reporting is required by the Adviser.

Additionally, mutual funds have certain fundamental investment restrictions that must be followed when you manage the portfolio of the mutual fund. And they can’t be changed without shareholder vote. One of the most common restrictions for diversified funds is the “diversification test.” There’s also a concentration limits for percent of industry holdings and, of course, IRS restrictions. All these center around investment of the mutual fund.

CCO Buzz: Are there other regulatory considerations?

Tina Mitchell:  Yes, marketing is another area that carries additional regulations that affect advisers. Some of the regulations, pertaining to marketing, are under the Securities Act of 1933, FINRA Rules, and these are in addition to rule under the Investment Company Act.

It is very important that advisers to mutual funds be aware of all the various rules that they must follow and ensure that they have really robust policies, procedures and controls are in place.

CCO Buzz: Can Core Compliance help these advisers?

Tina Mitchell: Sure. Most of our consultants are well-versed in the regulations surrounding mutual funds and can assist firms with drafting policies and procedures, implementing internal controls and reporting to the mutual fund board (of trustees).

So, for more information on this topic or you want assistance, give us a call at (619) 278-0020- Thanks!

CCO Buzz: Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn or Twitter @CoreCLS. Thank you and we hope you tune into next week’s episode of the CCO Buzz.

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