FINRA and SEC Pursue BDs for Weak Due Diligence on Third-Party Products
FINRA and the SEC have brought actions against broker-dealers for failing to conduct proper due diligence of third-party private placements. FINRA sanctioned two firms and seven individuals, levying fines and imposing restitution. FINRA charges that the broker-dealers recommended investments that were not suitable and ignored red flags such as liquidity concerns, missed interest payments, and defaults. In the SEC action (brought against one of the parties named in the FINRA action), the SEC charges that the respondent did not conduct the due diligence for which it was paid, failed to request or review financial statements, and ignored warnings in third party due diligence reports.
OUR TAKE: Madoff has fundamentally changed the game for broker-dealers and registered investment advisers selling third party products. FINRA and the SEC have stressed an intermediary’s due diligence obligations especially where red flags suggest material concerns. Issuers should also expect a heightened level of scrutiny from BDs and RIAs.