Broker-Dealer's Due Diligence Duties for Private Placements Require Research and Supervision

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Over the past year, FINRA reminded broker-dealers of their responsibilities when selling private placements to clients through a series of disciplinary actions targeting brokerages whose supervisory systems and procedures have been lacking in this regard, and whose registered representative failed to conduct adequate due diligence and recommend products without a reasonable basis as to their suitability for clients.

FINRA first issued an investor alert in 2013 regarding private placements urging research, investigation, and information in order to make an informed decision about potential investment in such an offering.

More recently, FINRA in its March 2021 discipline of Dalmore Group LLC cited the firm for failing to establish and maintain a supervisory system reasonably designed to achieve compliance with industry rules. Investigators pointed to two private placement offerings Dalmore recommended and sold to customers without performing adequate research into the offerings that could have uncovered relevant information, such as a securities-related litigation against a key director and officer of the issuer.

FINRA noted the firm failed to conduct and document reasonable investigations of the offerings before recommending the securities to its customers. Typically, such an investigation, research, or due diligence into an offering's business plans, prospects, regulatory restrictions, and issuer position is a key step for two reasons. First, a broker performing adequate research into a private placement helps train and educate the financial professional on the offering's features and related information about the issuer/company, such as potential red flags or other warning signs.  Second a firm must make a "reasonable basis" suitability determination, affirmatively finding that the proposed investment may be suitable for some investors (e.g., very wealthy, experienced, and risk-seeking speculators) before allowing it to be sold

These steps also help a stockbroker perform the customer-specific suitability analysis (determining whether or not a product is suitable for a customer, given that client's investment objectives and risk tolerance preferences).  

FINRA also cited the firm for late private placement filings, or failing to timely submit to FINRA a copy of a private placement memorandum, term sheet, or other offering document that has been used in connection with a sale.

If you have invested with a broker, financial adviser, or other registered representative whose failure to adequately research and investigate a private placement before recommending such an offering to you, and this potentially unsuitable recommendation has proven harmful to your investments or interests, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

All information in the above post was verified as accurate at the time of posting. We invite readers and the subject(s) of the posting to contact us with new or updated information.