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What the OCIE Risk Alert Means for Funds

Updated: Mar 18

Authors: Cheryl Leibowitz and Alisha Dowell


Earlier this month, the SEC Office of Compliance Inspections and Examinations (“OCIE”) released a risk alert specifying the most commonly cited areas of compliance deficiencies during the course of mutual fund, money market fund, and target-date fund exams. Similar to investment advisers, mutual funds are subject to routine examinations. Periodically, OCIE releases alerts to the investment community identifying areas of risk or concern based upon its observations in exams. In general, the deficiencies pertaining to mutual funds outlined in this risk alert were concentrated in the areas of the Fund Compliance Rule, Disclosures to Investors, the Section 15(c) Process, and Fund Codes of Ethics.

Mutual Fund Observations

The Fund Compliance rule requires that funds establish written policies and procedures designed to prevent violations of the federal compliance rules. OCIE’s primary observations related to policies and procedures were that the compliance programs did not consider the fund’s business activities and that policies and procedures were not enforced. OCIE also observed that annual reviews were not performed, and the reviews that were performed did not address the adequacy of policies and procedures to mitigate risk. In addition, OCIE observed that funds did not implement policies and procedures to provide proper oversight of their service providers, such as not monitoring the pricing and valuation processes and failing to approve policies of subadvisors.


Many federal securities laws contain prohibitions on making untrue or materially misleading statements or omissions in documents filed with the Commission or otherwise provided to investors. From the perspective of funds, this means that prospectuses, statements of information, and shareholder reports, among other items, must reflect the fund’s actual business practices and strategies. OCIE observed that in many investor documents, information relating to fees paid to service providers, investment strategies, and risks did not accurately reflect how the fund was doing business.


Section 15(c) of the 40 Act requires that a majority of the independent directors on the board of a mutual fund approve the agreement with the Investment Adviser to the Fund, prior to entering into the agreement. The approval requirement assigns an obligation, on the part of directors, to request and review all information that would be necessary to evaluate the initiation or continuation of a contract with the adviser. Furthermore, the fund must maintain the documentation that the board reviewed and considered, and the basis for the decision must be included in the next shareholder report. Some of the observed deficiencies related to 15(c) included necessary information not being requested (such as fund profitability to the adviser or fee comparisons) and that the board did not request information that was not provided. OCIE also observed that shareholder reports did not adequately discuss material factors in the contract decision and that some funds did not maintain written copies of the documentation that they considered.


Similarly to the Investment Adviser rules, Mutual Funds also have a code of ethics requirement to prevent access persons from engaging in bad acts in connection with fund securities. Some of the common observations were a failure by the fund to implement and enforce a code of ethics by failing to designate someone to review the CCO’s transactions and failing to collect or review transaction reports and a failure to enforce pre-clearance rules. OCIE also noted that some funds did not provide a code of ethics report to the board or did not provide an accurate code of ethics report.

Money Market and Target Date Fund Observations

The Money Market Fund (“MMF”) and Target Date Fund (“TDF”) initiatives revealed that most of these types of funds were in general compliance with the 40 Act and applicable rules. However, some deficiencies noted regarding these funds were that some MMFs did not maintain sufficient documentation in their files to support the determination made as to whether a security is an “eligible security” and did not include the required summary of significant assumptions used in stress testing. Similarly to other mutual funds, certain deficiencies were noted relating to policies and procedures and advertising materials. Regarding TDFs, OCIE noted deficiencies in disclosures in investor documentation and marketing materials and incomplete policies and procedures, similar to mutual funds as a whole.

How We Can Help

Key Bridge Compliance has experience in both the advisory and mutual fund regulatory spheres. We are able to assist you in developing your mutual fund compliance program to meet SEC requirements, including:

  • Working with you on creating policies and procedures designed to mitigate the specific risks arising out of your business;

  • Reviewing your written documentation, filings, and marketing materials for compliance with SEC rules;

  • Structuring and documenting your board reporting to direct all necessary material and points for discussion to the Board; and

  • Administering your code of ethics reporting program.

Please feel free to contact us to assist with your mutual fund or advisory compliance needs.