SEC issues alternatives risk alert

By BenefitsPro

By Dan Berman

An examination by the Securities and Exchange Commission found that pension fund consultants and other advisors were lax in vetting alternative investments.

The SEC’s Office of Compliance Inspections and Examinations issued a Risk Alert, reminding advisors it is part of their fiduciary duty to ensure any investment meets a client’s investment objectives and is consistent with the written objectives of a fund.

“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.

Underscoring the popularity of alternative investments among pension funds was a BlackRock survey that found that real estate and hedge funds were part of the strategy of many for 2014.

For its check of the industry, the OCIE looked at more than 10 SEC registered investment advisors who handled more than $2 trillion in assets. All of them invested in or recommended private fund and fund of private fund instruments.

The deficiencies noted by the OCIE were that advisors:
  • Omitted 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;
  • Provided potentially misleading information in marketing materials about the scope and depth of due diligence conducted;
  • Have due diligence practices that differed from those described in the advisers’ disclosures to clients.
Advisors, the office said, had improved over past examinations by:
  • 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.
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