The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) recently issued a Risk Alert describing current industry trends and practices in investment advisers’ due diligence on alternative investment vehicles, as well as certain deficiencies observed in several of the advisory firms examined. In response, Cordium is hosting a Webinar which will cover the SEC observations as related to third party due diligence background checks and best practice for advisers that are fiduciaries acting in the best interest of their clients with an open Question and Answer session to follow. Please join the team at Cordium as they discuss some suggested best practice guidelines regarding third party due diligence background checks and the observations highlighted by the SEC in their recently issued Risk Alert. Topics for discussion will include: - Conducting comprehensive background checks of managers, key personnel and entities - Verifying critical service provider relationships - Performing regulatory history checks - Review of offering document materials, information and data directly from the managers of alternative investments - Validating information provided by managers of alternative investments - Formalizing due diligence policies and procedures - Annual reviews

1. April 3, 2014CORDIUM POWERPOINT MASTER 1

2. 2
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3. THE SEC’s RISK ALERT
AND A GUIDE TO
THIRD PARTY DUE
DILIGENCE BEST
PRACTICE
APRIL 2, 2014 3
Cordium Webinar – April 2nd
2014

4. Introductions and Format
Speakers
oZabrina T. Barile
o Partner, Principal - Cordium
o Manager, Due Diligence Department
oWendy Torres
o Assistant Vice President, Due Diligence Department – Cordium
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Please submit any questions throughout the duration of the
webinar in the question panel within the GoToWebinar
application

5. Questions
5
You can submit your questions
using the Questions area in the
GoToWebinar console
You can submit your questions
using the Questions area in the
GoToWebinar console
© Copyright APRIL 2, 2014

6. Agenda
• Introduction
• OCIE Risk Alert
• Third-party service providers
• Service provider relationships
• Independent background checks
• Regulatory history review
• Legal document review
• Terms and issues
• Due diligence frameworks
• Due diligence deficiencies
• Conclusion
• Q&A
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7. Introduction
o The U.S. Securities and Exchange Commission (“SEC”) Office of
Compliance Inspections and Examination’s (“OCIE”) recently
issued a Risk Alert on “Investment Adviser Due Diligence
Processes for Selecting Alternative Investments and their
Respective Managers” which highlighted industry trends and
deficiencies observed during their examination.
https://www.sec.gov/about/offices/ocie/adviser-due-diligence-alternative-investments.pdf
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8. Focus of the Examination and Basis for the Risk
Alert
o The Risk Alert is based on examinations of SEC-registered
investment advisers that manage and/or recommend
alternative investments to their clients.
o SEC is placing an increased emphasis on advisers due
diligence processes, disclosures and evaluations.
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9. Utilizing Third Party Service Providers to
Supplement Analyses and Validate Information
o Advisers delegated some of their responsibilities to third-
party service providers specializing in such services to
supplement their due diligence processes.
o Periodic reviews of such providers’ should be conducted to
ensure they are adhering to their agreements and
responsibilities.
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10. Independent Verification of Information:
Service Provider Relationships
o Advisers independently verifying relationships with key third-
party service providers, such as administrators, custodians,
and auditors.
o Intensive due diligence should be conducted to ensure that
the service provider can provide an adequate level of service
to the alternative investment.
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11. Independent Verification of Information:
Service Provider Relationships continued
o Best Practice Guidelines:
o Confirm current relationships
o Check for potential conflicts of interest
o Confirm that the service provider is independent
o Research lesser known service providers
o Conduct service provider confirmations periodically
o Check for multiple changes in service providers over a short period of
time
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12. Independent Verification of Information:
Background Checks
o Staff observations revealed that most advisers employed the
services of third-party firms to conduct independent
comprehensive background checks on the managers and their
key personnel.
o A thorough analysis of all findings located should be
conducted by those with investigative, analytical, industry,
and research experience. Such third-party firms, if utilized,
should be able to locate and identify any red flags or
derogatory information.
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13. Independent Verification of Information:
Background Checks continued
o Investors should focus on the following areas when
conducting an independent background check:
o Civil and Criminal Filings
o Bankruptcy, Judgments, Liens and UCC Filings
o Mortgage and Property Transaction Filings
o Regulatory Registrations and Memberships
o Regulatory Violations and Disciplinary Issues
o Relevant and Adverse News Articles
o Anti-Money Laundering (AML) Watch-lists and Politically Exposed
Persons (PEP)
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14. Independent Verification of Information:
Validating Information Provided
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15. Independent Verification of Information:
Regulatory History Review
o Some advisers utilized FINRA BrokerCheck to research the
backgrounds of current and former FINRA registered
brokerage firms and individual broker-dealers.
o In doing so, advisers can check for:
o License or Registration
o Disciplinary Actions
o Regulatory Actions
o Civil or Criminal Litigation
o Investor Complaints
o Educational and Employment Histories
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16. Independent Verification of Information:
Regulatory History Review continued
o The staff also observed that some advisers reviewed
regulatory filings, such as Form ADVs for managers’ histories.
http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx
o Form ADV Part 1 - Regulatory or civil litigation within the past ten
years.
o Form ADV Part 2 - Adviser’s business practices, fees, conflicts of
interest, and disciplinary information.
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17. Noted Improvements to the Due Diligence
Process: Legal Document Reviews
o Most advisers included a review of legal documents as part of
their due diligence process in an effort to detect legal
document risk.
o At minimum, the following should be reviewed:
o Offering Memorandums and Prospectuses
o Subscription Documents
o Articles of Incorporation
o Due Diligence Questionnaires and Marketing Material
o Organizational charts and Biographies of the Principals
o Financials (last three years) and Valuation Policies
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18. Noted Improvements to the Due Diligence
Process: A Focus on Terms and Issues
o Gather all disclosed data to identify if there are any:
o Inconsistencies in the description of terms among the various
disclosure documents
o False or misleading statements made in the marketing materials
o Undisclosed potential conflicts of interests or fee arrangement
o Terms in accordance with industry standards
o The staff observed that advisers’ due diligence teams tended to focus closely on
liquidity issues; likely attributed to managers imposing redemption restrictions on
investors during the financial crisis.
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19. Noted Improvements to the Due Diligence
Process: Due Diligence Frameworks in Place
o OCIE found that all advisers examined had either a formal or
informal due diligence framework in place.
o Those who adopted detailed written policies and procedures
and adequate documentation were more likely to
consistently apply such policies and procedures.
o Tailored policies and procedures are essential to internal
operations and risk management models.
o Policies should be based on best practices with the goal of
satisfying client expectations and regulatory requirements.
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20. Due Diligence Deficiencies Observed
o The staff observed that with some advisers, the following
deficiencies were found:
o Due diligence policies and procedures were omitted from annual
reviews
o Due diligence practices differed from those disclosed to clients
o Misleading information about the scope and depth of due diligence
conducted
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21. Conclusion
o Develop best practice due diligence guidelines in accord with
due diligence industry practices and trends as well as the
deficiencies observed in the Risk Alert.
o Periodically audit due diligence practices carried out
internally and those delegated to third-party service
providers. Make sure they conform with any disclosed
policies, procedures and controls.
o Continuously update any due diligence frameworks in place in
tandem with new internal policy updates, risks, regulatory
updates and industry practices.
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22. Questions
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You can submit your questions
using the Questions area in the
GoToWebinar console
You can submit your questions
using the Questions area in the
GoToWebinar console
© Copyright

23. Speaker biographies
DUE DILIGENCE RESEARCH & REPORTING 23
Zabrina T. Barile, Principal/Vice President
Zabrina joined Cordium in August 2004 and manages the Due Diligence Research
and Reporting Division. She is in charge of overseeing the research and
verifications teams and serves as the primary client contact for Due Diligence
clients. Additionally, she focuses on the development, growth and marketing of
the due diligence research and reporting services. Zabrina graduated from
Fordham University in 1998 with a B.A. and a J.D. from St. John’s University
School of Law in 2001.
Wendy Toribio-Torres, Assistant Vice President
Wendy joined Cordium as a Due Diligence Research intern in August of
2005 during her senior year at New York University. Upon graduation from
NYU, Wendy became a full-time DDR employee at Cordium. She was
promoted to Senior DDR Associate and most recently to Assistant Vice
President. Wendy received a B.A. in Psychology from New York University
in 2006 and is currently pursuing her MBA at Kenan-Flagler Business School
at the University of North Carolina.
APRIL 2, 2014