FINRA recently issued a regulatory notice on Private Placements, reminding broker-dealers of their duty to conduct reasonable investigations in recommending investments in Regulation D offerings.
The notice provides that any broker-dealer recommending securities under Regulation D must the suitability requirement under NASD Rule 2310 and must comply with the advertising and supervisory rules of FINRA and the SEC.
FINRA has found problems in recent examinations and investigations, including sales and fraud practice abuses in Regulation D offerings. FINRA noted that a broker-dealer’s customer may be sophisticated does not obviate the duty to investigate.
Broker-dealers also must resolve any conflicts of interest that could impair their ability to conduct a thorough and independent investigation.
Further, a broker-dealer must note any information that it encounters that could be considered a “red flag” that would alert a product person to conduct a further inquiry. When presented with red flags, the broker-dealer must do more than simply rely upon representations by the issuer’s management.
Firms must also have supervisory procedures reasonably designed to ensure that the firm’s personnel, including its registered representatives engage in an inquiry that is sufficiently rigorous to comply with their legal and regulatory duties.
Finally, a reasonable investigation of the quality of the issuer’s assets and facilities is required. Such a reasonable investigation might include visits and inspections of such assets or facilities; examining geological or other reports; and obtaining expert opinions.
For the complete Regulatory Notice 10-22, click the link below: