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Overview

All investment companies registered with the Securities and Exchange Commission ("SEC") were required by Rule 38a-1 under the Investment Company Act of 1940 to adopt and implement by October 5, 2004 written policies and procedures ("Compliance Programs") reasonably designed to prevent violations of the federal securities laws. By the same date, funds were required to appoint a Chief Compliance Officer ("CCO") responsible for administering the Compliance Program. Each fund’s Compliance Program, as well as the Compliance Programs of each investment adviser, principal underwriter, administrator and transfer agent of the fund ("Fund Service Providers"), had to be approved by the fund’s Board of Directors or Trustees, including a majority of the independent directors or trustees.

SEC Examination of Compliance Programs

The SEC has indicated that during fund examinations, the staff will closely examine a fund’s Compliance Program to determine whether the program is effective in identifying, correcting and deterring compliance failures. The SEC examiners also will evaluate whether the fund has a strong commitment to compliance, i.e., a culture of compliance. Accordingly, SEC examiners can be expected to focus on the following areas.

The Creation and Adoption of the Compliance Program

The SEC will examine the process by which the fund’s Compliance Program was created and adopted. As part of this evaluation, the SEC may:

• Request copies of a fund’s analysis of compliance risks (the "GAP Analysis") and the policies and procedures adopted to address or minimize those risks.
• Review the process by which the fund conducted the GAP Analysis, including the identities of the individuals involved.
• Request Board minutes and materials to understand the process the Board used to evaluate, and ultimately approve, the Compliance Programs.
• Request interviews with independent trustees to understand their role in evaluating the Compliance Programs.

The Effective Implementation of the Compliance Program

The SEC will attempt to determine whether the Compliance Program has been effectively implemented and whether it provides for continuous reassessment. To this end, the SEC may:

• Request copies of surveillance and exception reports, forms, compliance committee minutes, amended policies, testing results, and other documents that demonstrate that policies and procedures are being implemented and monitored for continued effectiveness.
• Request copies of the CCO’s annual report to the Board.
• Request copies of the fund’s compliance budget.

The Independence and Effectiveness of the CCO

The SEC will evaluate the adequacy, effectiveness and independence of the CCO by examining:

• Copies of the CCO’s annual report to the Board and copies of briefing materials presented to the fund’s Board in connection with the Board’s review of the Compliance Programs. The SEC also may request a summary of the Board’s deliberation process.
• Documents, processes and procedures that demonstrate the CCO’s independence from fund management, including a chart that evidences the CCO’s placement in the organizational structure.
• Materials that demonstrate the CCO’s authority and scope of activities.
• Materials that demonstrate the quality of the CCO’s relationship with the Board, including the frequency of the CCO’s communication and interaction with the Board.
• Materials that demonstrate the CCO’s interaction with Fund Service Providers and compliance staff.
• The CCO’s education, experience and familiarity with the fund’s operations.
• The CCO’s familiarity with the fund’s Compliance Program and the Compliance Programs of the Fund Service Providers.
• The CCO’s compensation package and compensation history.
• The resources available to the CCO, as well as the CCO’s request for resources and responses to those requests.
• Minutes, if any, of meetings in executive session with the Board.

Education and Training Programs

The SEC may request information on compliance training and education. A well-documented and effective training program can help a fund demonstrate a culture of compliance.

Recordkeeping

The SEC will request copies of the Com-pliance Programs that currently are in effect, or were in effect for any time within the past five years. In addition, the SEC will request copies of materials provided to the Board in connection with its approval of the Compliance Programs of the fund and each Fund Service Provider, as well as the Chief Compliance Officer’s annual written reports.

For More Information

Please contact Michael V. Wible, Donald S. Mendelsohn, or JoAnn M. Strasser or any member of our Corporate Transactions & Securities practice group for more information.

Disclosure

This advisory may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgement of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel. This document may be considered attorney advertising in some jurisdictions. Some of the design images and photographs in this document may be of actors depicting fictional scenes. This document may be considered attorney advertising in some jurisdictions. Some of the design images and photographs in this document may be of actors depicting fictional scenes.