SEC issues reminder on investment adviser due diligence

BY KEN TYSIAC

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.

SPONSORED REPORT

Post-busy season checklist

Now that tax season is over, pause for some introspection to guarantee that next year’s busy season is even better. Bonus: “Dirty dozen” scams list to share with your clients. Sponsored by Thomson Reuters, Bloomberg BNA, Bloomberg BNA // Software and Wolters Kluwer.

QUIZ

News quiz: Risks are top of mind in finance

Americans are worried about risks to their financial security. Accountants also see risks to their organizations and their careers. See how much you know about recent news and reports with this quiz.

CHECKLIST

Auditing risks in culture

Cultural flaws can seriously damage an organization. Here’s how internal auditors can reduce risks by embedding culture audits into existing audit programs.