As mutual funds prepare reports to their boards on the procedures they have implemented for preventing future regulatory infractions, the
Last year, the SEC passed a law requiring all funds to review policies on an annual basis, taking into regard codes of ethics, use of soft dollars, market timing and service providers. Funds are expected to report these measures to their boards every year.
The SEC rule, however, left much open to interpretation for CCOs, who are hired to oversee all regulatory policies, and these executives are required to present their first- ever annual review to fund boards by June.
The ICI paper, entitled, "Assessing the Adequacy and Effectiveness of A Fund's Compliance Policies and Procedures," is industry's first guideline on how to follow the SEC rule.
Robert Plaze, associate director of the SEC's division of investment management, said he thought the ICI had done a good job of mapping out a blueprint for fund CCOs. "I think it was particularly useful that it was done in a plain English way so that it comes alive," he told Dow Jones.
Not only will the SEC be going to funds and scrutinizing their compliance measures, but it will also ask them for copies of CCOs' annual reports to fund boards.
ICI recommends several tests to see just how effective a fund's compliance policies and measures are. Some of these suggestions are: interviewing key personnel; observation of actual fund activities in real time; testing transactional data, like reviewing the fund's trades; and reviewing existing reports on fund operations, like service provider reports, internal audit reports and attestation reports.
One section of the paper lists the types of reports a fund company might use. Another section suggests methods for testing data. "For example, assume a fund imposes a 2% redemption fee whenever a shareholder redeems shares within 30 days of purchase," ICI writes. "Testing whether the redemption fee was imposed in accordance with the fund's policies and procedures requires two pieces of information - those trades redeemed within 30 days of purchase and the redemption fees imposed on all trades."
"This is a seminal event for us," said Elizabeth Krentzman, ICI general counsel. "I think the industry has already been doing a lot of testing, but the SEC release didn't go into a lot of detail. Our paper for the first time sets out in one place various options a CCO can look at."
Geoff Bobroff, a mutual fund consultant based in East Greenwich, R.I., said, "We're going to continue down the path at seeing how this new compliance structure imposed in 2004 is helping to ferret out issues, but investors won't see enforcements as result of the reports. The good news for the industry is that we have no more black eyes because the system is working."
