Diligence Review Corp. has released a report that identifies by name the 473 private fund advisors with “significant adverse regulatory events” listed on SEC Form ADV.
In March of this year, many private fund advisors began supplying key data to the Securities and Exchange Commission (“SEC”) via Form ADV. According to the June 1, 2012 data, 4,084 private fund advisors were registered. Of those advisors, Diligence Review Corp. identified 473 of advisors (11.58%) that a “significant adverse regulatory event” reported. This 1-in-9 finding is consistent with the rate of regulatory violations the company found previously in the May 1, 2012 SEC data. Diligence Review Corp.’s 25-page Due Diligence Report of Private Fund Advisors (Including Hedge Fund Advisors and Private Equity Advisors) identifies each of the 473 firms by name and the number of types of events.
Diligence Review Corp. considers “significant adverse regulatory events” to be red flags in the investor due diligence process. A “red flag” is defined by Diligence Review Corp. as any high-risk item that a prudent investor would seek to investigate and understand prior to investing. There are 24 questions on the Form ADV within Item 11, a primary section of Form ADV that relates to the disclosure of legal and regulatory violations. ”Of these 24 questions, Diligence Review Corp. selected the 8 that, in our view, constitute the most significant regulatory areas for an investor to know about,” stated Jennifer Cooper, Managing Director. “An advisory firm answering “yes” to one of these 8 questions possesses a significant adverse regulatory event.”
“This report provides an unprecedented view of the private fund industry. It will be real time-saver for professionals who oversee portfolios of investments, such as fund-of-funds advisors, investment consultants, investment officers, trustees, and auditors,” said Cooper. “Users of this report are able to see at a glance which private fund advisors have indicated key legal or regulatory violations on their record. Since many private fund advisors are newly registered as of March 2012, many investors may have engaged an advisor without having reviewed the Form ADV information,” Cooper added.
In the report, investment advisors are grouped according to the number of “yes” responses disclosed to 8 key questions in Item 11 of SEC Form ADV. Then, the advisors are listed in alphabetical order. The types of significant adverse regulatory violations are listed for each of the 473 firms identified in the report.
Specifically, the report indicates:
• 2 firms have all 8 of the 8 key violation types disclosed for the firm or its affiliates
• 3 firms have 7 of the 8 key violation types disclosed for the firm or its affiliates
• 17 firms have 6 of the 8 key violation types disclosed for the firm or its affiliates
• 27 firms have 5 of the 8 key violation types disclosed for the firm or its affiliates
• 45 firms have 4 of the 8 key violations types disclosed for the firm or its affiliates
• 44 firms have 3 of the 8 key violations types disclosed for the firm or its affiliates
• 147 firms have 2 of the 8 key violations types disclosed for the firm or its affiliates; and
• 188 firms have 1 of the 8 key violations types disclosed for the firm or its affiliates.
“Many financial services firms act in a variety of roles – such as banker, broker, or consultant – and these roles can lead to potential conflicts of interest, especially when the firm is balancing a loyalty to the company’s shareholders as well as to investment advisory clients. Some firms navigate and appropriately manage these potential conflicts of interest. Other firms demonstrate a chronic problem of not placing clients’ interests first.” said Cooper. “The question for each investor to ask himself or herself is whether a particular firm should be managing a hedge fund or private equity fund for the investor.”
The report is intended for investors who invest in hedge funds, private equity funds or other private fund investments. The report cost is $195. It is available in digital form only. Purchasers of the report may download 5 copies of the report within a one month period. The report may be purchased online from Diligence Review Corp. at http://www.due-diligence-reports.com/products/due-diligence-report-private-fund-advisors.