Asset managers and mutual fund firms have been subject to new regulations in recent months. Considering the June 1 deadline to gather all data required for Form N-PORT reporting, firms should ensure they are prepared.

In its 2018 National Exam Program Examination Priorities, the SEC's Office of Compliance Inspections and Examinations indicated they will focus on ETFs and mutual funds. Those that may be reviewed include funds that have experienced poor performance or liquidity, registered investment companies managed by investment advisors with little experience, and funds that hold securities that are potentially difficult to value during periods of market stress.

For ETFs, the focus will include the review and analysis of investment risk disclosures for funds that have little secondary market trading volume and may face the risk of being delisted or forced to liquidate assets. Following are steps to help asset managers and funds prepare for regulatory review.

The SEC's Office of Compliance Inspections and Examinations indicated they will focus on ETFs and mutual funds Bloomberg News


For a routine examination, registrants are usually notified by phone in advance of an exam, giving firms time to gather supporting documentations and prepare the chief compliance officer and staff for exam interviews. Following weeks of preparation for their arrival, regulatory examiners will want a general meeting that kicks off the on-site portion of the exam.

In this meeting, you should expect to provide an overview of your firm and compliance program — initial meetings enable examiners to become familiar with your firm's structure and governance, key employees, investment strategies, clients and operations.

Senior management should conduct a presentation on behalf of your firm and answer general questions about the compliance program. The CCO should then conduct a more detailed presentation of the compliance program. Examiners may look to gauge the dynamic between the CCO and your firm's leadership to confirm the expertise and empowerment of the individual designated to manage your compliance program.

The examiners may commence by asking for your professional background, including your education and training.

They will focus on your responsibilities within the firm. Keep responses brief and to the point. They will then ask questions that are more specific regarding how you perform those responsibilities.

Employees should be prepared to discuss the compliance policies and procedures applicable to the functions they perform or supervise. For example, processes would include the selection of investments, suitability analysis, ongoing due diligence, allocation of investment opportunities, selection and assessment of executing broker-dealers and portfolio monitoring. You may want to have the CCO prepare employees for this interview and have a brief outline of potential questions to help staff stay on point.

  • The examiner will have questions about content in your firm's response to their initial request list. For example, they may request to speak with the most knowledgeable person to review a particular document on a specific topic. Designate and adequately prepare the right person to respond to the examiner's interest regarding specific topics.
  • Interviewees should answer questions directly, only elaborating when needed. A response that contradicts a document provided to the examiners may impair the smooth progress of the examination.
  • Regulatory examiners understand there could be mistakes when answering questions, as we are all human. It's customary to go back and restate an answer that may have been incorrect. That said, if no one knows the answer, you should tell the examiner you'll get back to them with a response.
  • The examiner will usually ask for backup documentation in certain cases, typically where hardcopy documents are available to confirm. This is normal. Before providing these materials, review them with your CCO.

Examiners will spend a significant amount of time in the designated conference room, reading the provided materials and taking notes during interviews and when answering questions. As they continue their exam, questions and information requests will arise.

There may be areas in which the examiner feels the information provided has gaps or issues, or topics have not been properly addressed. It's a best practice to address these promptly while the examiners are on-site. Doing so may eliminate a comment in the deficiency letter, or the deficiency item could include a mitigating statement that the item was addressed during the exam.

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The CCO should request an exit interview to discuss the exam's status. This provides an opportunity to review open issues regulators may believe are deficiencies. Examiners may want to conduct the exit interview on the last day while on-site, and/or schedule an exit interview later, on- or off-site, while the exam is ongoing after their visit.

After the on-site portion of the exam concludes, examiners may have follow-up requests for some time.

The firm, coordinated by the CCO, should respond promptly to all requests, in the same process as when preparing the initial responses. Commission rules require that exams be completed within six months of an on-site review or within six months of receiving all materials requested, whichever comes later.

An examination can have one of three outcomes, which are not mutually exclusive. Reviewers will:

  • Issue a letter to the registrant indicating that no deficiencies were identified;
  • Issue a letter describing the deficiencies and requiring the registrant to implement appropriate corrective actions, and submitting a written response describing the actions; or
  • Refer deficiency matters to other investigatory or enforcement staff of the SEC.

Although there are times when no deficiency may be found, the SEC often issues a deficiency letter.

The letter typically outlines background information and citations of the regulations or law, responses to questions asked during the exam, details of what was reviewed and any issues or recommendations identified during the exam.

The CCO and registrant will need to provide a written response to the deficiency letter within 30 days, describing either grounds for disputing the deficiency or the steps that have or will be taken to remedy the deficiencies.

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Carl M. Rizzo

Carl M. Rizzo

Carl M. Rizzo is a director at regulatory consulting firm Alaric Compliance Services.
Joseph M. DiBartolo

Joseph M. DiBartolo

Joseph M. DiBartolo is a director at regulatory consulting firm Alaric Compliance Services.