BROWSE BY TOPIC
- Bad Brokers
- Compliance Concepts
- Investor Protection
- Investments - Unsuitable
- Investments - Strategies
- Wall Street News
- Investments - Private
- Rules & Regulations
- Bad Advisors
- Boiler Rooms
- Terminations/Cost Cutting
- General News
- Donald Trump & Co.
- Regulatory Sanctions
- Big Banks
Stories of Interest
- Sarah ten Siethoff is New Associate Director of SEC Investment Management Rulemaking Office
- Catherine Keating Appointed CEO of BNY Mellon Wealth Management
- Credit Suisse to Pay $47Mn to Resolve DOJ Asia Probe
- SEC Chair Clayton Goes 'Hat in Hand' Before Congress on 2019 Budget Request
- SEC's Opening Remarks to the Elder Justice Coordinating Council
- Massachusetts Jury Convicts CA Attorney of Securities Fraud
- Deutsche Bank Says 3 Senior Investment Bankers to Leave Firm
- World’s Biggest Hedge Fund Reportedly ‘Bearish On Financial Assets’
- SEC Fines Constant Contact, Popular Email Marketer, for Overstating Subscriber Numbers
- SocGen Agrees to Pay $1.3 Billion to End Libya, Libor Probes
- Cryptocurrency Exchange Bitfinex Briefly Halts Trading After Cyber Attack
- SEC Names Valerie Szczepanik Senior Advisor for Digital Assets and Innovation
- SEC Modernizes Delivery of Fund Reports, Seeks Public Feedback on Improving Fund Disclosure
- NYSE Says SEC Plan to Limit Exchange Rebates Would Hurt Investors
- Deutsche Bank faces another challenge with Fed stress test
- Former JPMorgan Broker Files racial discrimination suit against company
- $3.3Mn Winning Bid for Lunch with Warren Buffett
- Julie Erhardt is SEC's New Acting Chief Risk Officer
- Chyhe Becker is SEC's New Acting Chief Economist, Acting Director of Economic and Risk Analysis Division
- Getting a Handle on Virtual Currencies - FINRA
We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.
Stay Informed with the latest fanancialish news.
NEWSLETTERS & ALERTS
Reasonable Diligence for Private Placements (FINRA Exam Findings – Part 4)
by Howard Haykin
FINRA 2018 FINDINGS – WHAT WORKS.
Reasonable diligence by member firms with regard to private placements is typically characterized by:
- meaningful, independent research of material aspects of the offering;
- identification of red flags with the offering or the issuer;
- addressing and resolving of concerns that would be relevant to a potential investor;
- creation of a due diligence committee (at larger firms) or formal designation of one or more qualified persons (at smaller firms), and charging them with investigating and determining whether to approve the offering for sale to investors.
When offerings involve issuers that were affiliates of the firm or whose control persons were also employed by the firm, reasonable diligence would be extended to address:
- mitigating conflicts of interest;
- ensuring that the offerings were suitable for investors in spite of such conflicts of interest;
- developing comprehensive disclosures;
- establishing post-approval processes and investment limits based on the complexity or risk level of the offering.
Additional pointers would include:
- After the offering, ongoing diligence to ascertain whether offering proceeds were used in a manner consistent with the offering memorandum, particularly when the firms engaged in ongoing sales of an offering after initial closing;
- documentation of both the “process and results” of a firm's diligence analysis.
FINRA FINDINGS – WHAT DIDN’T WORK.
Insufficient diligence efforts (in scope or depth) by member firms with regard to private placements might include:
- No Reasonable Diligence – Prior to recommending offerings to retail investors, some firms:
- performed no additional research about new offerings because they relied on their experience with the same issuer in previous offerings.
- reviewed the offering memorandum and other relevant offering documentation, but did not discuss the offering in greater detail with the issuer or independently verify, research or analyze material aspects of the offerings.
- did not investigate red flags identified during the reasonable diligence process – e.g., in offerings involving conservation tax easements, some firms did not investigate red flags that included, but were not limited to, significant risk of the IRS disallowing tax deductions, as well as concerns regarding land appraisals.
- Overreliance on Third Parties – Upon receiving due diligence reports prepared by due diligence consultants, experts or other 3rd-party vendors, some firm did not independently evaluate the provided conclusions, respond to red flags or significant concerns noted in the reports; nor did address concerns about the issuer or the offering that were apparent outside the context of the report.
- Potentially Conflicted Third-Party Due Diligence – Some firms did not consider possible conflicts of interest when evaluating and assessing 3rd-party reports that issuers had paid for or provided in their due diligence analysis.