The Securities and Exchange Commission published a new risk alert on investment advisers and alternative investments. It’s a rambling piece that spends most its time laying out the OCIE’s observations on due diligence practices. To the extent there is any focus, it’s focus is on the perspective of advisers to pension funds and managers of funds of private funds.
I skipped over the industry practices to the compliance section in Section II. The SEC highlights some deficiencies that caught my attention.
The first is the inclusion of due diligence policies and procedures as part of the annual review. This struck me as a bit odd. It didn’t strike me that diligence procedures are necessarily part of ensuing compliance with securities laws.
That odd bit comes back into the picture in the disclosure issues. The OCIE staff found that advisers were making statements about their disclosure practices, but then operating in a different manner. This goes back to the Hennessee Group case where a fund manager touted its expansive diligence process, but failed to conduct the diligence. Hennessee ended up investing in Sam Israel’s Bayou Fund. Hennessee’s touted diligence practices, if they had followed them, should have spotted Bayou as a fraud and not invested.
The last tidbit on compliance was allowing adviser’s employees to invest along side the client. However, some advisers were allowing employees to have preferential treatment on liquidity and fees.
From that perspective, the industry practices in Section I make more sense. OCIE is painting a picture of best practices on diligence procedures for investing in alternative investments. This is what OCIE is going to be looking for from pension fund advisers and fund of fund managers.