|September 2, 2014|
Previously published on August 29, 2014
Funds that use alternative investment strategies should be aware of the SEC focus on their use in mutual funds and should evaluate their policies and procedures regarding, among other things, asset segregation and liquidity determination. Additional information regarding SEC statements on alternative investment strategies is found below.
Even for funds that do not use alternative investment strategies, the SEC’s sweep examination regarding alternative investments has revealed that the SEC is very focused on the quality of board minutes and ensuring that the board minutes report key determinations related to compliance with the Investment Company Act. So, all funds should evaluate the quality of their minutes.
In a public address, SEC Investment Management Director Norm Champ spoke about the growing use of alternative investment strategies employed by open-end mutual funds. He talked about the potential benefits and the risks associated with these funds and related developments at the SEC. Champ emphasized the importance of monitoring and managing the risks that arise in connection with alternative mutual funds.
Champ suggested that alternative mutual fund managers consider a number of issues in connection with the development of robust valuation policies and procedures, including the requirement to monitor for circumstances that might necessitate the use of fair value prices. He noted that managers also might wish to address the methodology by which the fund determines fair value, the process for price overrides, and assurance that controls are in place to review, monitor, and approve all overrides in a timely manner. In addition, he stated that the policies and procedures also should address the prompt notification to, and review and approval by, persons not directly involved in portfolio management to mitigate any conflicts of interest.
In the area of liquidity, Champ said that significant holdings of securities that are fair-valued by alternative mutual funds might raise concerns about the liquidity of the holdings, including the process for testing and monitoring liquidity to comply with the Investment Company Act liquidity limitation. The staff believes that funds should consider setting criteria for assessing the liquidity of a security and consider including the criteria in written policies and procedures for registered fund compliance programs.