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Due Diligence

Sunday, April 17, 2016

Many financial services professionals seem to forget that they have a fiduciary responsibility when it comes to the valuation of securities. Although it is acceptable for one to rely on the pricing of the products provided by the custodian with which client securities are held, not all financial professional’s client portfolios are invested 100% in listed securities products.

Many financial service professionals like to look for products that may not be tied to the market, or provide a hedge to listed products being held in their client’s accounts. In these instances non-traditional, non-listed products may be recommended or purchased to meet these investment strategies. When looking at these types of products, it is important to note that going to IARD or the SEC’s website is not going to satisfy the fiduciary responsibility of conducting proper due diligence when researching alternative investments. It is important to search the secretary of state in which the issuer is domiciled (i.e. Nevada and/or Delaware) to check for affiliated entities. All corporate officers of the issuer should also be checked through the Secretary of State to see if they own or are listed as an officer of any other entities. Once that has been verified, it is important to conduct thorough research on the executive officers, affiliated entities, affiliated entity’s corporate officers and any salespeople with whom you have been dealing to determine if any of these individuals have any type of criminal background, or if the entities, corporate officers or salespeople have any past or pending litigation.

Once the issuer, affiliates and affiliated person have passed the initial phase of the due diligence process, it’s time to start on the product itself. At this point, it will be important to ask detailed questions about the product. Let’s take a non-listed REIT for instance. It is extremely important to request a list of all properties owned by the trust. Once that information has been obtained, the properties should be checked against the local tax records to one, verify ownership, and two, determine the taxable and appraised value. If the portfolio consists of rental properties, either commercial or residential, it is a good idea to contact the property’s management office or the company managing the property to verify rental rates, occupancy rates and see if they will provide a history of revenue. This should be a routine process as long as any clients remain invested in the product; no one should accept the value on statements provided by the issuer as accurate, or truthful.
Right now you are thinking that this is a lot of work. This is entirely true. However, if you are charging a fee for the assets under your management, or have received a commission, this is what is referred to as “earning your keep”. It could also prevent being a victim of a fraud, investing a client in a fraudulent product, and most important, losing your livelihood and/or a civil suit.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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