FSI Ramps Up Due Diligence Efforts

PaperworkSince the most recent financial crisis, complex products such as non-traded real estate investment trusts, business development companies, equipment leasing products, and oil and gas partnerships have come under increased scrutiny by regulatory agencies including FINRA, state securities regulators, and the SEC. In this environment, due diligence processes and procedures have become critical to ensuring products are properly reviewed and vetted before being sold to investors.

In an effort to keep advisors updated on developments in this area, we formed a task force composed of due diligence professionals from FSI member firms who worked to produce new white paper, titled A Survey and Analysis of Current Due Diligence Processes for Complex Products, which surveys and compares the policies and procedures in place by a select group of FSI member broker-dealers to address the due diligence obligations for complex products. The goal of this survey is to share different approaches to confronting the due diligence challenges presented by the current regulatory climate, as well as the intricacies of complex products.

This paper begins by reviewing FINRA’s explanation of the characteristics that may render a specific financial product “complex” and then moves to the various suitability analyses that FINRA suggests broker dealers should perform. The paper continues with an overview of the processes put in place by selected member firms, provided on an anonymous basis.

The main takeaway from the paper is that there is no cookie-cutter approach to effective due diligence for complex products; rather, firms approach the issue in different ways depending on firm size, resources, products offered, and a variety of other variables.

In addition, we recently announced the formation of the Due Diligence Council. The Council will meet monthly to discuss pertinent issues with regard to due diligence in our industry and to develop content and initiatives, possibly including webinars, working groups, and other member events. Serving as the first Chair and Vice Chair of the Due Diligence Task Force are Jordan Flebotte, Director of Due Diligence at ProEquities, Inc., and Brian O’Donnell, Vice President of Wealth Management Products and Solutions/Financial Planning Compliance at Ameriprise Financial. We look forward to supporting the important work of our new Council, and invite interested members to apply for an open seat on the council if interested!


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