FINRA Highlights Best Practices for Private Placement Offering Investigations

FINRA recommended practices for broker-dealers when conducting investigations of private placement offerings.

In a Regulatory Notice, FINRA reminded broker-dealers of their obligations to conduct a "reasonable investigation" of an issuer and their recommended securities in private offerings (noting that only approximately 20% of Regulation D offerings involve broker-dealers and are subject to FINRA rules). FINRA advised broker-dealers to:

• examine offering terms to understand whether they will comply with FINRA rules;
• maintain contact with the issuer to stay updated on developments with the offering;
• give special focus to offerings with "complex features" or "unique benefits" to investors; and
• retain records regarding the process and results of an investigation of an offering.

FINRA emphasized the importance of broker-dealers independently verifying information provided in an issuer’s material representations and claims. FINRA alerted broker dealers to instances when "red flags are present."

Further, FINRA encouraged broker-dealers to consider improving supervisory practices in their private placement reasonable investigations, such as:

• using a "reasonably designed" checklist;
• assigning specific individuals to be responsible for conducting a private placement reasonable investigation and creating a system that alerts individuals to upcoming or missed filing deadlines;
• requiring documents on the process and results of the investigation to be collected and retained;
• establishing standards for conducting a reasonable investigation and account for different offering types; and
• ensuring that the sale of an offering is not placed before the completion of its reasonable investigation.

FINRA also pointed industry participants to a related Regulatory Notice soliciting comments on potential changes to FINRA rules in order to make the capital raising process more efficient.