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SEC issues risk alert on advisers' selection of alternative investments

  • SEC (US Securities and Exchange Commission) Image

Jan 29, 2014

The SEC staff issued a Risk Alert yesterday on investment advisers' due diligence processes for selecting alternative investments. The alert is a summary of observations made by staff in the Office of Compliance Inspections and Examinations (the "staff"); it describes current industry trends and notes compliance deficiencies.

Alternative investments — private funds such as hedge funds, private equity funds, venture capital, real estate, and funds of private funds — are a rapidly growing asset class. The due diligence process for these types of investments can be more challenging because of the characteristics of private offerings and the complexity of alternative investment strategies.

The Risk Alert compared current observations with those of prior periods and found that advisers are:

  • Seeking more and broader information and data directly from managers of alternative investments.
  • Utilizing third parties to supplement analyses and validate information regarding alternative investments.
  • Performing additional quantitative analyses and risk measures on the alternative investments and their managers.
  • Enhancing and expanding their due diligence processes and focus areas.

The staff also noted the following deficiencies in several of the advisory firms it examined:

  • Omitting alternative investment due diligence policies and procedures from their annual reviews.
  • Providing potentially misleading information in marketing materials about the scope and depth of the due diligence conducted.
  • Having due diligence practices that differed from those described in the advisers' disclosures to clients.

More information is available in the press release and Risk Alert on the SEC's Web site.

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