New York (HedgeCo.Net) – The SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a 10 page Risk Alert (pdf) on the due diligence processes that investment advisers use when they recommend or place clients’ assets in alternative investments such as hedge funds, private equity funds, or funds of private funds.
“Money continues to flow into alternative investments. We thought it was important to assess advisers’ due diligence processes and to promote compliance with existing legal requirements, including the duty to ensure that such investments or recommendations are consistent with client objectives,” said OCIE Director Drew Bowden.
Some issues the alert mentions are that advisers are:
- Seeking more information and data directly from the managers of alternative investments
- Using third parties to supplement and validate information provided by managers of alternative investments
- Performing additional quantitative analysis and risk assessment of alternative investments and their managers.
Additionally, staff observed certain deficiencies in several of the advisory firms examined, including:
- Omitting alternative investment due diligence policies and procedures from their annual reviews, even though these investments comprised a large portion of certain advisers’ investments on behalf of clients
- Providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted
- Having due diligence practices that differed from those described in the advisers’ disclosures to clients.
Advisers are required by Rule 206(4)-7 under the Advisers Act to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and to annually review the adequacy of those policies and procedures and the effectiveness of their implementation.
These requirements include:
(i) naming a Chief Compliance Officer (“CCO”) to administer their programs;
(ii) adopting compliance policies and procedures; and
(iii) completing annual reviews of the effectiveness of their compliance policies and procedures.
Additionally, while typically not incorporated into the advisers’ compliance manuals, many of the advisers examined by the SEC did have formal due diligence policies and procedures, the report concludes.
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