- Index funds that track custom-built indexes
- Smaller ETFs and/or ETFs with little secondary market trading volume
- Mutual funds with aberrational underperformance relative to their peer groups
- Mutual funds with higher allocations to certain securitized assets
- Side-by-side management of mutual funds and private funds
- Funds managed by advisers that are relatively new to managing registered investment companies
Given my areas of interest, number 5 interested me the most. OCIE is stating that managing a private fund and a mutual fund is a risk indicator.
The Risk Alert points to three main issues: Allocation of investments, allocation of expenses and proper disclosures.
If a manager is getting paid more for performance in one investment platform over the other, there is an incentive to put the best investment opportunities in the higher paying platform. That is a compliance concern for all fund managers with more than one investment platform. Everyone needs good allocation policies and procedures.
As for expenses, different platforms may have different agreements on the investors willingness to pay some expenses. Compliance needs to be focused on making sure the manager is not putting all of an expense on the platform that can pay that expense when it should be allocated to more platforms. If the platform does not pay the expense, then the manager pays.
Of course, disclosure is key to investment adviser compliance. A manager needs to disclose and operate within that disclosure.