Enforcement Action Regarding Failure to Follow Firm Diligence Policies

The SEC entered into a settlement with an investment adviser for failing to perform adequate due diligence on, and monitor, certain investments contrary to representations in its Form ADV Part 2A and in communications with its clients.

According to the Order, dated Nov. 6, the adviser advised clients to purchase certain investments that contained repurchase agreements. The investments underlying the repos consisted of loans the investment adviser believed were guaranteed by the U.S. Department of Agriculture, but in fact were not. During initial due diligence, certain concerning information was not escalated to the adviser’s investment committee or senior management. Although the adviser said it would advise clients of ongoing due diligence and monitoring of repo counterparties, it failed to adequately do so.

In addition to due diligence and monitoring failures, the SEC found that the adviser’s compliance program lacked sufficient resources and the adviser failed to reasonably design and implement certain policies and procedures. Further, the adviser did not consistently follow its repo allocation policy disclosed in its Form ADV Part 2A.

With Form ADV annual updates due in the not-too-distant future–March 31, 2019–this enforcement action is an important reminder to follow the policies and procedures identified in their Form ADV brochure and offering materials. This includes policies for valuations, diligence, co-investment, etc.