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.