More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- Regulatory Oversight of Investment Advisors Although the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.
The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations issued a risk alert on Tuesday warning advisors to be careful when recommending alternative investments like hedge funds, private equity funds or funds of private funds to clients.
The SEC examined a small group of advisors to pension plans and funds of private funds with approximately $2 trillion in investor assets to assess their strengths and weaknesses as far as due diligence.
Some firms are not reviewing their due diligence policies and procedures regarding alternatives in their annual reviews. Marketing materials might also be misleading clients on how extensive the due diligence process is, and some firms’ processes might be different from what is described in disclosures.
Furthermore, the SEC noted that while many of the advisors examined had written due diligence policies in place and those that didn’t had at least an informal process, those with written policies were more likely to follow them consistently.
Advisors who use third-party service providers should also conduct reviews of those providers to make sure they’re abiding by their agreements, the alert said.
The alert acknowledged that advisors are performing due diligence when investing client assets in alternatives. Compared with previous examinations, advisors are more frequently going directly to the managers of alternative investments for information. The alert noted that managers are often reluctant to share too much information about their investments; consequently, successfully getting information from managers was a result of negotiation between advisors and managers.
Another due diligence trend is that advisors are supplementing the data they do receive from managers with third-party research and additional quantitative analysis and risk assessment. The alert said advisors used risk aggregators and service providers like administrators, custodians and auditors to conduct due diligence on alternatives. In some cases where advisors were unfamiliar with a service provider, they would conduct due diligence on it, too.
Some advisors refused to invest with private alternative funds if they didn’t have an independent third-party administrator, according to the alert.
“Money continues to flow into alternative investments," said OCIE Director Drew Bowden. "We thought it was important to assess advisors’ 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.”
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