SEC issues reminder on investment adviser due diligence

BY KEN TYSIAC
January 28, 2014

Investment advisers need to follow appropriate due-diligence processes when recommending or placing clients’ assets in alternative investments such as hedge funds, private-equity funds, or funds of private funds, the SEC said in a risk alert issued Tuesday.

According to the alert from the SEC’s Office of Compliance Inspections and Examinations (OCIE), advisers are:

  • Seeking more information and data directly from the managers of alternative investments.
  • Getting third parties to supplement and validate the information managers of alternative investments provide.
  • Performing additional quantitative analysis and risk assessment of alternative investments and their managers.


“Money continues to flow into alternative investments,” OCIE Director Drew Bowden said in a news release. “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.”

While examining advisory firms, SEC staff observed the following deficiencies:

  • 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 due diligence conducted.
  • Having due-diligence procedures that differ from those they describe in disclosures to their clients.


Ken Tysiac (
ktysiac@aicpa.org ) is a JofA senior editor.

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