Mutual fund directors and investment advisers digest

Mutual Fund Directors and Investment Advisers Digest is a periodic digest that provides the latest developments and information for mutual fund directors and investment advisers.

Issue 6: New SEC proposal’s impact on reporting requirements of investment companies and investment advisers

On May 20, 2015, the US Securities and Exchange Commission (SEC or "Commission") issued newly proposed rules, forms, and amendments that the SEC believes will increase and improve the reporting and disclosure of information provided by investment companies and investment advisers. The rules are proposed in order to provide additional information to investors and to more effectively gather data of investment companies and investment advisers.

In addition to proposed amendments to Form ADV and the books and records rule of the Investment Adviser Act, the SEC has proposed the following:

  • A new Form N-PORT, which will replace Form N-Q and require monthly disclosure of portfolio holdings for certain investment companies along with additional information not currently required in Form N-Q or Form N-CSR.
  • Amendments to Regulation S-X, among other proposed changes, requiring standardized disclosures for derivatives and securities lending.
  • Allowing funds to require certain information online and change the default option criteria.
  • Replace Form N-SAR with Form N-CEN. This new form will have similar information to Form N-SAR, but will be updated to provide information that is more relevant. Additionally, Form N-CEN will be filed annually instead of the semi-annual requirement for Form N-SAR.
  • Both Form N-PORT and N-CEN will be required to be filed using the standard XML format.

Please download the latest issue for more information about the costs and benefits of the SEC’s newly issued proposals.

Issue 5: Money market fund rule frequently asked questions

In late April of this year, the staff of the SEC’s Division of Investment Management issued two releases containing 55 frequently asked questions (FAQs). The FAQs were designed to address questions that industry participants had about the final money market fund rule. The staff provided a detailed response for each question. While such responses merely represent the views of the staff and do not necessarily reflect the views of the SEC, they still provide a beneficial interpretation of the money market fund rule. Additionally, it is our belief that the SEC’s Office of Compliance Inspections and Examinations will refer to the FAQs as part of its inspection program.

This issue of the Digest focuses on the FAQs that specifically relate to the use of amortized cost by mutual funds that have a floating net asset value per share, including money market funds and non-money market funds, as well as director responsibilities and oversight.

Please download this issue to learn about the FAQs related to valuation guidance issued by the SEC staff and key considerations for directors.

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Issue 4: Money fund rule

Money fund rule

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On July 23, 2014, the US Securities and Exchange Commission (SEC) issued its final rule on money market fund reform. The rule is intended to prevent heavy redemptions on money funds in times of crisis by, among other changes, giving directors tools to react to heavy redemptions and by increasing transparency into money funds.

This issue of the Digest focuses on the responsibilities of directors related to fees and gates for retail money funds; and it provides an overview of the new valuation guidance on determining the fair value of short-term and thinly traded securities, as well as the use of pricing services. It is clear from the final rule and release that the SEC has emphasized the importance of the role of directors in money market reform. Fund boards need to act and work effectively to ensure that they meet the compliance date of October 14, 2016 for amendments related to liquidity fees and gates.

Download the current issue for more information about the rule and the new responsibilities of directors.

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Issue 3: Fair valuation

Fair valuation

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The US Securities and Exchange Commission (SEC) issued its findings against the former directors of the Morgan Keegan funds in connection with the fair valuation of the funds’ securities. The SEC has used the case as a platform to reiterate its long-standing position that fund directors are ultimately responsible for fair valuations and that directors must actively ensure that fair valuations are appropriate and related processes are working as intended (insert footnote). In our opinion, the case — combined with other recent SEC communications (insert footnote) — sends a clear message that the SEC will remain focused on valuation issues, making this an opportune time for directors to revisit their funds’ valuation practices and their oversight processes governing fair value decisions.

Important themes from the case for directors to consider include the following:

  1. Fair value methodologies and written policies and procedures, including stale prices
  • Consideration: Fund valuation procedures often include the fair valuation factors provided in ASR 118. In light of the case, directors should consider whether additional guidance should be provided in their funds’ documented procedures. Such guidance may include, for example, identifying which factors should be given greater weight in fair valuing certain investment types and how to use the factors to determine the fair value of a security or asset class. Directors should also determine if their funds’ procedures address stale prices.

2.  Adherence to procedural requirements in practice

  • Consideration: The case stands as a reminder that documented procedures must be followed in practice. Directors should consider reviewing or performing a walkthrough with management of the procedural requirements attending fair valuation decisions, including relevant internal controls and action/decision points.

3.  Board reporting, including price overrides

  • Consideration: Directors may want to assure that they receive sufficient information regarding securities that are fair valued including, for example, the type of security fair valued and the methodology used to determine the fair valuation. Directors may want to specifically evaluate the reports they receive relative to price overrides, including whether a fair valuation reflects a price override and the reason(s) for the override.

With fair valuation likely to remain in the spotlight, we expect directors across the industry to continue to review the findings of the case, benchmark their funds’ fair valuation processes against it, and make a determination whether to revise their fair valuation practices. The Morgan Keegan case makes it clear that the SEC expects directors to understand how fair value prices are being determined and to provide clear guidance relative to fair value decisions.


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Issue 2: Intermediary controls

Intermediary controls

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Increasing attention has been given to the use of Financial Intermediary Controls and Compliance Assessments (FICCA) as a means of enhancing fund oversight of intermediary relationships. FICCA is an independent internal controls attestation report that covers key focus areas relative to intermediary subaccounting services, such as transaction processing, reconciliations, and fee calculations. To complete a FICCA, an intermediary engages an independent accounting firm to examine its internal controls relating to specific service areas.
In light of the continuing shift towards intermediary subaccounting and the SEC’s focus in this area, directors may want to ask fund management if—as well as how—it has adapted to the changing landscape. Specific questions that fund directors may wish to consider include:

  1. What activities are being employed by management to oversee fund intermediaries?
  2. Which intermediaries currently providing subaccounting services for the funds are supplying a FICCA report and, if a FICCA is available, does the scope include the relevant control areas?
  3. For those intermediaries that are not supplying a FICCA report: 
    o   Has fund management requested one?
    o   Has the intermediary indicated why it does not plan to provide such a report?
  4. Is there an opportunity to enhance the content and/or timing of existing board reporting with the inclusion of a FICCA report?

To learn more about oversight practices designed to help mitigate these and other risks in connection with intermediary relationships, please download the report.

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Issue 1: The Omnibus Revolution

The Omnibus Revolution

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The shift to intermediary sub-accounting and the resulting proliferation of different intermediaries providing shareholder services has impacted the fund industry in a number of ways, including changes in economic models and more fragmented service structures. These developments underscore the need for enhanced oversight processes to monitor intermediary services and related compensation while also managing potential regulatory and other risks.

For directors, intermediary relationships typically warrant periodic discussion with fund management. Specifically, two key questions arise relating to how the risks associated with intermediary sub-accounting are being managed: What oversight is in place relative to the services provided by intermediaries, and what oversight is in place regarding the amount and nature of the fees being paid to intermediaries?

Download the PDF for more information about oversight practices designed to help mitigate these and other risks.

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