The SEC recently published a Risk Alert for Registered Investment Companies (RICs or funds) to assist funds and their advisers in preparing themselves for examination and support their ongoing compliance efforts.
The Risk Alert offers valuable insights on the examination process and shares staff observations with respect to a number of “core” review areas. These observations are based a review of deficiency letters sent to funds over the last four years and highlight frequent areas of weakness in relation to fund compliance programs, fund governance practices, filings and disclosures.
IDR’s Head of MLRO, Louis Dodd, discusses the compliance gaps identified in the Risk Alert, emphasizing those most relevant to AML compliance and how IDR’s offering can help.
- Adopting implementing, updating and or / enforcing policies and procedures
The alert outlined failures to put in place and effectively implement policies and procedures that are “reasonably designed to prevent violations of law'” as being an area weakness with respective to fund compliance programs. Today’s ever-changing AML landscape presents and ongoing compliance challenge for fund managers, particularly those with funds across multiple jurisdictions and a large and international client base. Chief Compliance Officers (CCOs) must not only ensure that that their AML policies keep pace with and address the requirements of the latest legislation, they must also verify that investor KYC statuses remain current and that that their investors are screened against the latest sanctions lists in order to prevent compliance breaches. - Performing the required oversight and testing of compliance programs
The alert highlighted how many funds did not conduct annual compliance reviews. For AML compliance, regular testing is essential to ensure that programs meet best practices, comply with current legislation, and align with the fund’s risk profile. - Tailoring polices and procedures to the fund’s business model
SEC staff observed that fund boards did not perform required responsibilities with respect to adopting “certain written policies and procedures tailored to the funds’ operations”, with AML policies specifically given as an example. The application of a risk based approach is crucial for compliance programs in ensuring that they align with the risk profile of their funds and target resources to maximum effect. In September, FinCEN issued a Final Rule for Investment Advisers to address illicit finance and national security threats, a key component of which is the requirement to implement a risk based and reasonably designed AML/CFT policy. This rule is effective from 1 January 2026. - Provision of information and reporting to fund boards
The alert drew attention to shortcomings with respect to the provision of key information to fund boards including CCOs not providing “requisite written annual compliance reports” and boards not receiving “certain information to effectively oversee fund practices”. Consistent, current reporting on AML compliance—such as investor and fund risk ratings, changes to risk status, and material screening results—helps boards promptly address compliance issues and meet governance standards.
How can IDR help?
Delivered in conjunction with our KYC solution, IDR’s MLCO support service helps to ease the burden associated with AML compliance simply and cost effectively with no additional hassle for your investors. Our offering includes:
- One and done authentication of all your investors to the highest international standards.
- All investor profiles are maintained centrally in our trusted hub, updated as needed and screened daily against sanctions and enforcements lists.
- Comprehensive MLCO reporting, including investor KYC status and risk rating.
- AML based regulatory returns.
- Support from our MLRO team with respect to recommendations on key risks, updates to the board on AML related matters and insights on regulatory changes.
- Compliance monitoring testing with actionable outcomes and recommendations detailed in an annual report.
For more information, contact Louis Dodd or download our MLCO support brochure.
