OCIE Issues Risk Alert on Alt Due Diligence
The staff of the SEC’s Office of Compliance Inspections and Examinations has issued a Risk Alert about adviser due diligence practices for selecting alternative investments and managers. The staff provides “observations” from examinations about advisers’ compliance failures: (i) no annual review of due diligence procedures; (ii) disclosure that did not match actual due diligence practices; (iii) unsubstantiated due diligence claims in marketing materials; (iv) a lack of compliance oversight; and (v) access person co-investing on more favorable terms. The staff also highlighted “widespread trends” for alternative investment due diligence: (a) requiring position-level transparency (e.g. exposures and concentrations); (b) separate account management over pooled vehicles; (c) use of portfolio information aggregators; (d) verification of third-party service providers; (e) requiring an independent third party administrator; (f) conducting background checks; and (g) more quantitative analysis.
OUR TAKE: Firms that recommend alternative products or managers cannot simply choose what they know or like. They must have a detailed and written process for selection and ongoing monitoring. As suggested in the staff’s “widespread trends,” we recommend utilizing third party service providers to at ensure adequate process and independence.