More Due Diligence for Investments in Private Funds

Securities and Derivative Litigation   |   March 31, 2014
Download Download   
Share Share Page

The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a January 28, 2014 Risk Alert summarizing current practices and trends in how investment advisers conduct due diligence on private funds they recommend or cause their clients to invest in. Such funds include hedge funds, private equity, venture capital, and real estate funds, as well as "funds of" such funds.

Based on OCIE’s own observations and outside studies, the nine-page Risk Alert contains a wealth of information about due diligence practices and trends. Although OCIE generally does not specifically recommend procedures for advisers to follow, given their particular circumstances, many advisers will doubtless compare (and in some respects conform) their procedures to those in the Risk Alert.

OCIE does, however, specifically identify the following as deficiencies:

  • An adviser’s failure to annually evaluate the adequacy and effectiveness of its due diligence policies and procedures for private funds, notwithstanding that investing in or recommending such investments was a key part of the adviser’s business;
  • Failure to assure that the adviser does not make disclosures about its due diligence practices and capabilities that are inconsistent with the facts or "with fiduciary principles," or that are materially incomplete; and
  • Investment in private funds by an adviser’s related persons on more favorable terms than are available to the adviser’s clients, without maintaining required records about why each such investment by a related person was permitted.

Broker-dealers, too, have extensive due diligence responsibilities when they are involved with private offerings. In 2010, FINRA articulated many of those responsibilities—which are often similar to those described in OCIE’s Risk Alert—in Regulatory Notice 10-22. Moreover, FINRA’s published regulatory and examination priorities for 2014 single out broker-dealers’ possible failures to perform these responsibilities as a prominent area of concern.


©2022 Carlton Fields, P.A. Carlton Fields practices law in California through Carlton Fields, LLP. Carlton Fields publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information and educational purposes only, and should not be relied on as if it were advice about a particular fact situation. The distribution of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship with Carlton Fields. This publication may not be quoted or referred to in any other publication or proceeding without the prior written consent of the firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our Contact Us form via the link below. The views set forth herein are the personal views of the author and do not necessarily reflect those of the firm. This site may contain hypertext links to information created and maintained by other entities. Carlton Fields does not control or guarantee the accuracy or completeness of this outside information, nor is the inclusion of a link to be intended as an endorsement of those outside sites.

Subscribe to Publications


The information on this website is presented as a service for our clients and Internet users and is not intended to be legal advice, nor should you consider it as such. Although we welcome your inquiries, please keep in mind that merely contacting us will not establish an attorney-client relationship between us. Consequently, you should not convey any confidential information to us until a formal attorney-client relationship has been established. Please remember that electronic correspondence on the internet is not secure and that you should not include sensitive or confidential information in messages. With that in mind, we look forward to hearing from you.