SEC flags deficiencies in LP due diligence

Pension consultants and other advisers who help LPs screen private equity and hedge fund managers were given a performance grade by the US Securities and Exchange Commission (SEC) that may impact the vetting of GPs in the future.

In a risk alert issued Tuesday, SEC staff said LP advisers are not always delivering on their promise of robust due diligence.

“For example, one adviser overstated the number of research analysts and their average years of experience in the industry,” the risk alert said.

Moreover, LP consultants did not always disclose their due diligence policies and procedures in their annual reviews, the SEC observed after completing 10 presence exams on LP advisors. It is unclear how this deficiency might translate into fund advisors’ own compliance requirements when completing the annual review, industry lawyers said. 

The alert describes developing industry trends and practices in advisers’ due diligence procedures.

Compared to observations from prior periods, SEC staff noted advisers are seeking more information and data directly from GPs; verifying GPs’ relationships with third-party service providers such as administrators, custodians and auditors; running more background checks on fund managers and their key personnel; and performing more quantitative analyses and risk assessments to detect any aberrations in investment returns. 

On service providers, the alert said some advisors are conducting more due diligence on third party entities they are unfamiliar with and prefer GPs with independent fund administrators to oversee valuation estimates, fund accounting, trade reconciliation and processing and recording shareholder activity.

“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 in a statement head SEC inspector Andrew Bowden.

The full risk alert can be read by clicking HERE.