The Securities and Exchange Commission’s (SEC)’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert to provide investment companies, investors and other market participants with information on the most often cited deficiencies and weaknesses that the staff has observed in recent examinations of registered investment companies (funds).
The Risk Alert includes observations by the staff from national examination initiatives focusing on money market funds (MMFs) and target-date funds (TDFs). OCIE staff examined MMFs for compliance with the amendments to the rules governing MMFs that became effective in October 2016. Money market fund reform required providers to establish a floating net asset value (NAV) for institutional prime money market funds, which will allow the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets. The rule updates also provide non-government retail money market funds with new tools, known as liquidity fees and redemption gates, to address potential runs on fund assets.
The SEC staff examined more than 70 MMFs across a wide range of fund categories, including government, prime, and tax-exempt funds, as well as MMFs that were also designated as retail MMFs, which are required to limit their beneficial owners to natural persons. For the most part, the OCIE found substantial compliance with the rules. However, it said some MMFs did not include in their credit files one or more of the factors required to be considered when determining whether a security presents minimal credit risks and is an eligible security, as defined under Rule 2a-7, and/or adequately document the periodic updating of their credit files to support the eligible security determination.
It also found some MMFs did not maintain records that adequately support their determination that investments in repurchase agreements with non-government entities were fully collateralized by cash or government securities (for government MMFs). There has been a move to government MMFs from prime MMFs since the amended rules.
In addition, some MMFs had not adopted and implemented compliance policies and procedures reasonably designed to address certain requirements under Rule 2a-7 and other areas, according to the Risk Alert.
OCIE staff also examined more than 30 TDFs, including both “to” and “through” funds, to review whether the TDFs’ assets were invested according to the asset allocations stated in the funds’ prospectuses, and whether the associated investment risks were consistent with fund disclosures (including representations made in marketing materials).
The OCIE found some TDFs had incomplete and potentially misleading disclosures in their prospectuses and advertisements, including disclosures regarding:
- Asset allocations, both current and prospective over time. For example, the TDFs had marketing materials with asset allocation disclosures that differed from the TDFs’ prospectus disclosures.
- Glide path changes and the impact of these glide path changes on asset allocations.
- Conflicts of interest, such as those that may result from the use of affiliated funds and affiliated investment advisers.
Many TDFs had incomplete or missing policies and procedures, including those for:
- Monitoring asset allocations, including ongoing monitoring.
- Overseeing implementation of changes to their current glide path asset allocations.
- Overseeing advertisements and sales literature, which resulted in advertising disclosures that were inconsistent with prospectus disclosures and were potentially misleading.
- Monitoring whether disclosures regarding glide path deviations were accurate.