Are you Performing Due Diligence?

Due Diligence

On July 30, 2015 Curian Capital (“Curian”), an SEC registered asset management firm, surprised the industry by posting a notice on their website stating they will no longer accept any new business and will only continue to manage existing business until approximately March 31, 2016, at which time they will be closing their doors. The notice stated Curian could no longer keep up with changes in the business but the company’s parent, Prudential plc, had disclosed Curian posted a loss of $27 million in 2014 due to a refund of about $55 million in fees.[1]

Curian’s main business is providing individual clients, institutions, and other investment advisers with customized investment management strategies, and they currently manage approximately $11 billion in assets. Their decision to close down the business causes clients and advisers to seek alternative managers.

The Curian announcement brings to light a firm’s obligation to perform due diligence on service providers, including third party investment advisers. The SEC Office of Compliance Inspections and Examinations (“OCIE”) issued guidance on January 28, 2014, titled “Investment Adviser Due Diligence Process for Selecting Alternative Investments and Their Respective Managers.”  Although the guidance was specific to alternative investments it is nonetheless applicable to traditional managers such as Curian and contains some helpful insights and suggestions. To be effective, due diligence should not be limited to annual questionnaires. While it is true that questionnaires and due diligence checklists are very useful, additional steps, such as on site visits and extensive interviews with key personnel go a long way in helping firms maintain a consistent and comprehensive process for due diligence.

Additionally, Chief Compliance Officers may want consider the following compliance risk management steps with regards to their firm’s due diligence processes:

  • Identify all investment products and service providers requiring due diligence reviews on an ongoing basis
  • Create a due diligence calendar that reflects the timing of reviews and the firm personnel responsible for such reviews
  • Train appropriate employees on firm requirements and the process for performing reviews
  • Ensure the process, analysis, and findings of each review performed are documented and maintained in an appropriate file
  • Evaluate the firm’s due diligence program on an annual basis to determine if any changes, or additional training or steps require implementation
  • Provide a report to senior management on findings and recommendations

CCLS can help. Not only do we routinely assists our advisory firm clients with the creation of their due diligence policies and procedures, we also assist them with performing a number of due diligence tasks. For more information on this and other related subjects, please contact us at info@corecls.com or (619) 278-0020.

[1]               See “Prudential PLC 2014 Half Year Results News Release” available at http://www.prudential.co.uk/~/media/Files/P/Prudential-Corp/group-news-releases/2014/news-release-busrev-120814.pdf