Practice question, Private fund due diligence
For one recent fund investment and one key service provider, show the due diligence performed against the process described to investors in the fund documents.
Taft practice question: not an official regulator question. SEC Division of Examinations, United States (federal). For SEC-registered advisers to private funds. Evidence category: Investment records.
Not legal advice. A practice prompt for rehearsing how your team explains its controls and evidence. No scoring, no model answer, no implication that a regulator will ask these words.
Authored by Taft. Last checked 2026-11-09. All questions.
Why it is relevant
Staff observed potential failures to conduct a reasonable investigation into an investment, to follow the due diligence process described to clients or investors, and to perform adequate due diligence on important service providers such as alternative data providers and placement agents.
Sources: [1] Section III.C, Due Diligence
Evidence to locate
Suggested, not mandatory. A regulator's actual request list governs.
No evidence cues listed.
Follow-up prompts
Where does the fund disclosure describe the process, and does the file match it?
Applicability
- Applies to
- SEC-registered advisers that manage private funds.
- Does not apply to
- Not stated.
Cite
Cite the official source first. Then: Taft Compliance Group, Exam-prep toolkit (draft), question q-private-fund-due-diligence, https://taftcompliance.com/resources/exam-prep-toolkit/questions/q-private-fund-due-diligence, last checked 2026-11-09.
Sources
U.S. Securities and Exchange Commission, Division of Examinations, Risk Alert: Observations from Examinations of Private Fund Advisers (staff statement). regulator guidance. Section III.C, Due Diligence.
https://www.sec.gov/files/private-fund-risk-alert-pt-2.pdf
Checked 2026-11-09; published 2022-01-27.
Supporting passage
EXAMS staff observed potential failures to conduct a reasonable investigation into an investment, to follow the due diligence process described to clients or investors, and to adopt and implement reasonably designed due diligence policies and procedures pursuant to the Compliance Rule: Lack of a reasonable investigation into underlying investments or funds. EXAMS staff observed advisers that did not perform reasonable investigations of investments in accordance with their policies and procedures, including the compliance and internal controls of the underlying investments or private funds in which they invested. In addition, the staff observed advisers that failed to perform adequate due diligence on important service providers, such as alternative data providers and placement agents.
Changes to this question
No released changes.