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(Article from Registered Funds Alert, February 2015)

For more information, please visit the Registered Funds Alert Resource Center.

Beginning in January 2014, the SEC has indicated a focus on the effect that changing interest rates have on bond funds. In the OCIE’s 2014 Examination Priorities, OCIE indicated that it would be monitoring the risks that a changing interest rate environment would pose to bond funds as well the appropriate disclosures to investors relating to such changes. Soon thereafter, the Division of Investment Management released a new guidance update regarding risk management in changing bond market conditions, which outlined several measures for fund advisers to consider, including: conducting fund liquidity stress tests; reviewing the adequacy of communications with fund boards, which allows the boards to oversee responses to manage effectively changing interest rate environments; and reviewing the adequacy of shareholder disclosures in light of these additional interest rate risks.

In September 2014, Staff announced plans to conduct a sweep examining between twenty-five and thirty fund complexes to review how well prepared bond funds are for a changing interest rate market and the adequacy of disclosures, among other subjects. The sweep information requests that have been sent by the SEC thus far include, among other things, requests related to: liquidity (including policies and procedures, responsible overseers, compliance risks, breakdown of liquid and illiquid assets, a description of the redemption lines of credit and procedures for and results of stress tests); general compliance reports and other documents; minutes of meetings; membership of the board and its committees and a board self-assessment; and other general fund and portfolio information. Accordingly, bond fund managers that have not already received such a request from the SEC should examine their preparedness for responding to such a request and, more generally, their preparedness for changes in interest rate environments.