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Private-Placement Guide Zeros In On Due Diligence of Broker/Dealers

Following the Medical Capital Holdings debacle and other problematic private-placement deals, the private-placement industry has decided to create a best practices guide aimed at broker/dealers that sell the high-risk products to investors.

As reported Oct. 19 article by Investment News, the guide will focus on three areas: private placements, oil and gas deals, and real estate funds.

A draft of the proposed guide was presented at a recent annual meeting of the Real Estate Investment Securities Association.

Last year, the Securities and Exchange Commission (SEC) levied fraud charges against two private placement issuers, Medical Capital Holdings and Provident Royalties LLC. Together, Medical Capital and Provident raised an estimated $2.7 billion, with each selling their offerings through networks of independent broker/dealers. Today, many of the broker/dealers involved in the sales – such as Securities America – are the subject of arbitration claims from investors and investigations from state securities regulators.

Provident and Medical Capital have since shut down. Amid their demise, a number of broker/dealers have said that they relied on outside reports for the information they disclosed about the products to investors.

That doesn’t mean broker/dealers are off the hook for performing their own due diligence, however. Earlier this year, the Financial Industry Regulatory Authority (FINRA) issued a notice to members stating that firms can’t rely solely on the private- placement sponsor for third-party due diligence.

“When presented with red flags, the broker-dealer must do more than simply rely upon representations by [an] issuer’s management, the disclosure in an offering document, or even a due diligence report of [an] issuer’s counsel,” the notice reads.

REISA’s due-diligence best-practices guide is designed to address those issues.

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