• SEC Issues Risk Alert on Selection of Alternative Investments
  • February 14, 2014 | Author: Luke B. Falgoust
  • Law Firm: Jones Walker LLP - New Orleans Office
  • On January 28, 2014, the Securities and Exchange Commission's Office of Compliance Inspections and Examinations ("OCIE") issued a Risk Alert addressing the due diligence practices of investment advisers when recommending or placing client assets in alternative investments, such as hedge funds, private equity, venture capital, real estate, and funds of private funds.

    As money continues to flow into alternative investments, the OCIE found it important to assess advisers' due diligence processes and to promote compliance with existing legal requirements, including the duty to ensure that such recommendations or investments are consistent with client objectives.

    The Risk Alert describes current industry trends and practices in advisers' due diligence, including that advisers are seeking more information and data directly from the managers of alternative investments and have increased their use of third parties to supplement and validate information provided by such managers. As compared to the OCIE's observations in earlier time periods, advisers are performing additional quantitative analysis and risk assessment of alternative investments and their managers.

    The Risk Alert also discusses certain deficiencies and control weaknesses, including (1) omitting alternative investment due diligence policies and procedures from annual reviews, even though these investments comprised a large portion of certain advisers' investments on behalf of clients; (2) providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted; and (3) utilizing due diligence practices that differed from those described in disclosures to clients.