Fund Directions - What Boards Should Know About Portfolio Compliance

What Boards Should Know About Portfolio Compliance

Mutual funds are highly regulated. One area of such regulation is portfolio restrictions imposed by a number of different sources. Typically, boards receive a report at each meeting regarding a fund's portfolio compliance with these restrictions. However, while that report may appear straightforward, there are a number of assumptions, various methodologies for calculations, data deficiencies and a host of other challenges that make the task of portfolio compliance monitoring more an art than a science even with today's advancements in technology.

George MartinezGeorge Martinez, executive director of fund administration, Michael Minella, v.p., and Lori Selsberg, assistant v.p. of JPMorgan Investor Services spoke with Fund Directions last month about what boards should know regarding investment restrictions, the issues and challenges in monitoring these restrictions and the main advantage and disadvantage of today's automated compliance systems.

Lori Selsberg

Portfolio Restrictions

Michael MinellaThe primary sources of fund portfolio investment restrictions come from the 1940 Act, the Internal Revenue Code, the language in a fund's prospectus and statement of additional information, and, in certain cases, state laws. These restrictions include things such as:

40 Act Restrictions

* A diversified fund must maintain at least 75% of total assets in issuers each of which may not represent more than 5% of total assets, cash and cash items and U.S. Government securities.

* A fund that declares it is not "concentrating" may not invest more than 25% of its total assets in any one industry.

* A fund must invest at least 80% of its net assets in the type of investment suggested by its name.

* A variable NAV fund may not have more than 15% of its net assets in illiquid securities.

IRC Restrictions

* On the last day of a fund's tax quarter-end, a fund may not invest more than 25% of its total assets in a single issuer.

* On the last day of a fund's tax quarter-end, at least 50% of the fund's total assets must be represented by cash and cash items, U.S. Government securities and issuers, each of which do ...

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What Boards Should Know About Portfolio Compliance