The US Securities and Exchange Commission’s (SEC) latest Risk Alert does not make for pleasant reading at asset managers. We look at what this means for the industry, and how our Board Reporting Solution helps firms streamline a complex reporting process.

The SEC comes out firing

Published on November 4, 2024, the Risk Alert outlined a series of concerns which the SEC has with asset managers’ governance practices, compliance programs, disclosures and regulatory reporting.

The SEC identified these shortcomings based on in-depth reviews of the deficiency letters it had sent out to registered asset managers over the previous four years.

“Although there will be changes happening at the SEC from January 2025, it would be wrong of asset managers to be complacent about the Risk Alert’s findings. As such, a thorough review of the processes and documentation around governance and SEC Rule 15(c) of the Investment Company Act, together with other aspects of compliance, is warranted,” said Devin McCune, VP of Board Solutions, at Broadridge.

The industry falls short

Corporate governance came in for particular scrutiny in the SEC’s Risk Alert.

“The SEC’s comments about fund boards raises questions as to whether some directors may be in breach of their SEC Rule 15(c) obligations, and this is certainly something which firms should be keeping tabs on,” continued McCune.

Among the SEC’s criticisms were that fund board approvals of advisory agreements appeared inconsistent with the Investment Company Act and funds’ own written compliance procedures. Rule 15(c) requires a fund board to request and evaluate, and a fund’s investment adviser to furnish – such information “as may reasonably be necessary to evaluate the terms of any contract.”

The Alert also added that fund boards did not receive certain information to effectively oversee fund practices.

It continued that boards did not perform all of their required responsibilities while fund board minutes did not fully document board actions. ¹

On asset managers’ compliance programs, the Risk Alert said: “Funds did not perform required oversight or reviews as stated in their policies and procedures or perform required assessments of the effectiveness of their compliance programs.

It highlighted that funds’ policies were not tailored to the funds’ business models or were incomplete, inaccurate, or inconsistent with actual practices, while codes of ethics “were not adopted, implemented, followed, enforced, or did not otherwise appear adequate.”

It also noted that CCOs did not provide requisite written annual compliance reports to fund boards. ²

On fund disclosures and regulatory reporting, more work needs to be done with the SEC saying that registration statements, fact sheets, and reports contain incomplete or outdated information or potentially misleading statements.

The Alert said that sales literature, e.g. websites, etc. appeared to contain untruths or omissions of material facts, adding that a number of funds mischaracterised their use of Environmental, Social, Governance (ESG) factors in their investment decision-making processes, compared to their actual practices.

“Although ESG is likely to be less of a priority for the SEC following the Election, I do believe the regulator will still make an example of managers who are making misleading ESG claims or greenwashing,” said McCune.

The SEC also noted that fund filings were either not made at all or were not being made on a timely basis. ³

Getting the house in order

The Risk Alert is a reminder to asset managers, particularly small to medium-sized institutions, that they need to make major improvements to their corporate governance practices and business operating models, if they are to reduce the likelihood of falling foul of the SEC.

“To start with, fund boards should be taking a close note of the SEC’s comments about governance, and conduct a thorough – and honest self-assessment - about whether they are fulfilling their obligations in line with the SEC’s expectations and SEC Rule 15(c). Compliance teams also need to identify what the SEC’s primary concerns are in this Alert. The good news is that the overwhelming majority of firms have done this work already,” said McCune.

If there are shortcomings in any of the areas flagged by the SEC, firms need to take corrective action. “A failure to do so could lead to serious ramifications, i.e. financial penalties, reputational damage, etc, in what could make it harder for managers to raise money, particularly in today’s challenging fundraising environment,” said McCune.

Finding the right help

Following this Risk Alert, asset managers are increasingly turning to their service providers for help.

Broadridge’s Board Reporting solution streamlines complex regulatory reporting processes, enabling asset managers to efficiently meet their SEC Rule 15(c) requirements while providing deep, actionable insights for informed decision-making.

This solution uniquely addresses the critical need for a unified approach to fund governance reporting. By leveraging our expertise in regulatory compliance, we simplify the reporting process, enhance board insights, and optimize fund performance, allowing fund managers to save time, reduce errors, and focus on strategic decisions that enhance shareholder value in an increasingly complex global regulatory landscape.

¹ SEC Risk Alert – November 4, 2024

² SEC Risk Alert – November 4, 2024

³ SEC Risk Alert – November 4, 2024