Investment companies continue to face scrutiny by the SEC due to the distinct role they serve to retail investors. The SEC examinations division, also known as EXAMS, aims to examine registered investment companies that have not had an SEC examination in a few years, and those who have never been examined, especially newly registered companies.
The JLG team believes that a thorough review of EXAM priorities and renewed efforts to employ the recommendations are highly advised. This is because the SEC continues to ramp up efforts in regulations and enforcement.
We have broken down the 2024 Examination Priorities to give you the tools to avoid becoming another SEC statistic. If you would like to speak to a member of our team about preparing for the examination, feel free to contact us at 619.298.2880. Here are the areas that the SEC will pay close attention to in 2024.
The Securities and Exchange Commission (SEC) has historically focused on particular areas when it comes to investment companies such as, evaluating a company’s compliance program and governance practices, paying special interest to the company’s fair valuation practices, especially, board supervision and obligations in maintaining fair valuation practices; assessing how effective and (effected) the company’s risk management protocols are in terms of the company’s derivatives and liquidity risk management; and analyzing how a company, including its board implements and oversees their derivatives risk management. Furthermore, the SEC holds investment companies to stringent rules regarding accuracy in disclosure to investors, and in reporting to the SEC, frequently reviewing if a registrant is meeting those requirements.
In addition to the areas above, registered investment companies should pay close attention to the following areas that the SEC has indicated may be points of interest in the 2024 examinations.
Advisory Fees: Examinations may include a review of the company’s compliance policies and procedures when it comes to administration of advisory fees and the adopted protocol for fee waivers and reimbursements, examining for any concerning fee structure or differences in how products and services are charged. This includes situations in which:
- different advisory fees are charged to different share classes on the same fund;
- different fee structures for identical strategies are offered via different distribution channels;
- high advisory fees compared to others’ fees for similar services;
- high registered investment company fees compared to fees of other registered investment companies, especially when performance is weaker than competitors.
Derivatives Risk Management: The SEC Examinations division may also review how registered investment companies have adopted compliance policies to adhere to the fund derivatives rule, including the implementation of a derivatives risk management program, accuracy of disclosures regarding the company’s use of derivatives, and the board’s governance of the program.
Response to Market Volatility: Finally, 2024 examinations may include review of the company’s adoption and implementation of policies and procedures in response to the exemptive order conditions in place for volatile market conditions.
The legal team at Jacko Law Group provides regulatory and compliance counsel to investment companies and assists them in preparation for EXAMS. We continue to monitor regulatory updates, keeping our clients informed and prepared. If you would like to speak to one of our securities regulatory and compliance lawyers, please call 619.298.2880.
To view the SEC report, please visit – 2024 Examination Priorities Report (sec.gov).