US SEC’s Office of Compliance Inspections and Examinations Issues Risk Alert on Alternative Investment Due Diligence Practices

February 05, 2014

The U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) recently published a risk alert (Risk Alert) summarizing the OCIE Staff’s observations regarding the due diligence practices of certain SEC-registered investment advisers that invested in or recommended private fund and fund of private fund investments (e.g., hedge funds and private equity funds) to their clients.1 The OCIE Staff examined the due diligence and related investment advisory practices of such advisers in order to evaluate how these advisers: (i) performed due diligence of alternative investments and their respective managers; (ii) identified, disclosed and mitigated potential conflicts of interest (e.g., benefits to the adviser or its employees for allocations made to alternative investments); and (iii) evaluated alternative investments and fund structures.

The Risk Alert describes the OCIE Staff’s observations of current industry trends in alternative investment due diligence practices. While the OCIE Staff did not generally take a position regarding the effectiveness or adequacy of these industry practices, the OCIE Staff did discuss several areas of potential deficiency.

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