The other day the Securities and Exchange Commission (SEC) released information wherein it identified deficiencies with many investment advisors due diligence procedures in relation to selecting alternative investments for their clients.  Those of us like Wittenberg Law who are in the investment trenches everyday on behalf of their clients often find that broker-dealers and investment advisors have deficiencies in their due diligence process, and some don’t even have a due diligence process.

That is a scary proposition for most investors because they believe that their advisor is watching out for them, but that is simply not true in more instances than people would care to know.

The SEC release is copied below.  If you invest, call Wittenberg Law to ensure you are being treated fairly.


SEC Issues Risk Alert on Investment Advisers’ Due Diligence Processes for Selecting Alternative Investments
2014-14 Washington D.C., Jan. 28, 2014 — The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) today issued a Risk Alert on the due diligence processes that investment advisers use when they recommend or place clients’ assets in alternative investments such as hedge funds, private equity funds, or funds of private funds.
“Money continues to flow into alternative investments. 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,” said OCIE Director Drew Bowden.

The alert describes current industry trends and practices in advisers’ due diligence. Compared to observations from prior periods, the staff noted that advisers are:

  • Seeking more information and data directly from the managers of alternative investments.
  • Using third parties to supplement and validate information provided by managers of alternative investments.
  • Performing additional quantitative analysis and risk assessment of alternative investments and their managers.

Additionally, staff observed certain deficiencies in several of the advisory firms examined, including:

  • Omitting alternative investment due diligence policies and procedures from their annual reviews, even though these investments comprised a large portion of certain advisers’ investments on behalf of clients.
  • Providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted.
  • Having due diligence practices that differed from those described in the advisers’ disclosures to clients.