Let’s address the semantics. A “compliance review” and an “operational due diligence review” are not necessarily mutually exclusive. How can an operational due diligence engagement be performed without understanding the compliance posture of the subject entity? While a compliance review of a regulated business must also address the applicable regulation, a review of both regulated and unregulated entities examine similar facets of the operations. There is compliance with regulatory rules, compliance with self imposed firm policies and procedures, and there are best practices to consider. All address operational risk at some level. The risk of inadequate compliance for both regulated and unregulated entities carries significant exposure which could impact operations. We believe many aspects of a traditional compliance review are only a subset of an operational due diligence review.
Traditional compliance consulting services include, but are not limited to, addressing the regulations and best practices established by the Investment Advisers Act of 1940, the Investment Company Act of 1940, the Securities Exchange Act of 1934, the Securities Act of 1933, and the Managed Funds Association. The President’s working groups for both private fund managers and investors have issued best practices.
Operational Due Diligence services focus on all aspects of operations and, depending on the engagement, may include extending beyond the investment manager’s operations. SEC3 will extend the reach and assess the investment vehicles’ structure and the risks related to activities performed by the services providers (administrators, transfer agents, auditors and lawyers etc.) We will drill down and provide a detailed report of our findings against the backdrop of the industry’s current best practices. Based on our assessment and through discussions with you, we offer recommendations, suggest practical enhancements, and assist in the implementation. We recognize each client is unique and always customize our deliverable to specifically meet those unique client needs whether they are investors, managers, directors or even regulators. Prior to performing any engagement, we sit down with each client to gain a thorough understanding of their due diligence focus and agree on a detailed scope for the engagement. Quite often, we are able to provide considerable input at this stage and as we identify areas of risk that the client may not have yet considered.
SEC3 examines the business to determine risk exposure from various perspectives. Each constituent has their unique concerns depending on their relationship to the entities involved. Based on the particular client type our detailed processes confirm whether appropriate controls are in place to mitigate the corresponding risk.
For managers, a partnership with us affords you the ability to continue to focus on your core business of investing, with the security and confidence that your firm’s compliance and operational responsibilities are being properly addressed. Our professionals have the regulatory expertise and industry experience to complement your resources and bridge the gap between operations, the regulations, and applicable best practices.
For investors, SEC3 provides an independent operational due diligence review including compliance of firms and funds operations. We have the knowledge and experience to detect operational weaknesses and strengths. We provide our assessment to you so that you can invest with the security and confidence that necessary controls are in place to mitigate operational risk. Prior to taking on investor and/or institutional clients SEC3 runs a conflict review to ensure our review is conducted at arm’s length. We do not manage assets, perform investment analysis or recommend funds based on investment performance. As such, SEC3 is never faced with the conflict of performing due diligence on its own work.