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SEC's Asset Management Unit Priorities

Last week, members of the Forum's staff attended an event in which SEC staff and a number of prominent attorneys discussed the SEC's Division of Enforcement's newly formed Asset Management Unit.  While the panelists covered a wide range of issues, including hedge funds, private equity funds and concerns about investment advisers with individual clients, much of the discussion was devoted to the mutual fund industry.  In particular, the discussion made clear that the SEC is looking closely at the activities of both funds and independent directors and that it plans to bring enforcement actions when appropriate.  The comments by the SEC staff members closely tracked testimony given in September by SEC Enforcement Division chief, Robert Khuzami, in which he said the division's Asset Management Unit would focus on disclosure, performance, and valuation by funds and their advisers.  

Our impression is that the SEC is looking closely at the following areas:

  • Advisory and other Service Fees - The SEC is clearly looking closely at the 15(c) process. As noted in SEC Enforcement Chief Khuzami's testimony, the staff are developing a set of analytic tools to permit them to identify outlier fees (both advisory and other service fees) and plan to use the results of these analyses to institute OCIE examinations and enforcement investigations.
  • The Role of the Board - The SEC staff clearly indicated that investigations into outlier fees will include analysis of whether independent directors have fulfilled their fiduciary obligations during the 15(c) process - in particular, whether directors are appropriately vetting fee arrangements. Conversely, the SEC staff also indicated that they would review whether advisers are providing directors with all information necessary to conduct a robust 15(c) process.
  • Disclosure Issues - The SEC is renewing its focus on disclosures regarding funds' investment strategies, including situations where funds are making investments that are contrary to disclosed strategy and where strategies are not sufficiently described in light of the investments made by funds.
  • Valuation - The SEC continues to examine closely situations in which portfolio securities are misvalued, particularly situations in which the incorrect valuation results from a failure to follow or deviation from established valuation procedures.
  • Bond Fund Initiative - The SEC is looking at a range of issues regarding bond funds, including valuation and use of leverage. To some extent, the SEC is using outlier performance as an indication that further regulatory attention may be warranted.

The discussion left the strong impression that the SEC is watching the fund industry more aggressively and more carefully than in the past and that it has a greater willingness to bring enforcement actions than it has in the past.