SEC Issues Risk Alert on Investment Advisers’ Due Diligence Processes for Selecting Alternative Investments

by Foley Hoag LLP

On January 28, 2014, the Office of Compliance Inspections and Examinations of the Securities and Exchange Commission (the “SEC”) issued a National Exam Program Risk Alert (the “Risk Alert”) resulting from its review of advisers’ due diligence processes for selecting alternative investments. The Risk Alert summarizes current industry practices and highlights deficiencies in advisers’ due diligence methods.

The SEC noted several trends regarding advisers’ due diligence processes in the Risk Alert, including:

  • Requesting Increased Information from Managers. Advisers are requesting increased and broader information and data directly from alternative investment managers.
  • Using Third-Party Service Providers. Advisers are using third-party service providers, such as administrators, custodians, and auditors to supplement analysis and validate information regarding alternative investments.
  • Increasing Due Diligence Processes. Advisers are enhancing and expanding their due diligence processes by establishing operational due diligence groups, reviewing legal documents, focusing on liquidity issues, expanding their review of audited financial statements, and conducting onsite visits to managers.
  • Adopting Detailed Written Policies. Advisers are more likely to have consistently applied due diligence processes if they adopted detailed written policies and procedures that required adequate documentation.

Rule 206(4)-7 under the Advisers Act of 1940 (the “Advisers Act”) requires advisers to adopt, implement, and annually review written policies and procedures reasonably designed to prevent violations of the Advisers Act. The Risk Alert highlighted several areas of deficiencies or control weaknesses in advisers’ due diligence practices as required by the Advisers Act, including:

  • Inadequate Annual Reviews. Some advisers are failing to review their due diligence policies and procedures for alternative investments in their annual reviews.
  • Providing Materially Different Disclosure to Clients. Some advisers are providing due diligence practice disclosures to clients that are materially different from their actual due diligence practices.
  • Providing Misleading Marketing Materials. Some advisers are providing marketing materials with possibly misleading or unsubstantiated information regarding the scope and depth of their due diligence processes.
  • Conflicts of Interest and Inadequate Recordkeeping Regarding Access Person Participation in Alternative Investments. Some advisers are recommending an alternative investment to their clients while also permitting access persons to acquire an interest in the same alternative investment, but with preferential investment terms. Such arrangements create a conflict of interest that may influence an adviser’s due diligence process to the detriment of clients. In addition, some advisers are not maintaining adequate records of any decision, and the reason supporting the decision, to approve the acquisition of such investments by access persons.

Advisers to funds of funds and separate accounts that invest in alternative investments should read the entire Risk Alert and consider whether any changes need to be made to their current due diligence processes (and related compliance policies and procedures) to conform such processes to industry standards and/or address any noted compliance deficiencies.

The full text of the Risk Alert is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Foley Hoag LLP | Attorney Advertising

Written by:

Foley Hoag LLP

Foley Hoag LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.