Essential Documents in the Due Diligence Process

September 23, 2016

Essential Documents in the Due Diligence Process

September 23, 2016 | by Beth Glavosek and Alan Royalty | Blue Vault and Blue Vault Due Diligence

businessman is analyzing through magnifying glass contract and

In the world of investments, due diligence describes the duty of care and review to be exercised in connection with evaluating public offerings of securities.[1]

With regard to alternative investments, it’s incumbent upon Independent Broker Dealers to thoroughly evaluate alternative investment offerings before making them available to financial advisors for their clients. In fact, the Financial Industry Regulatory Authority (FINRA) states that, “A Broker Dealer has a duty—enforceable under federal securities laws and FINRA rules—to conduct a reasonable investigation of securities that it recommends.”

Collecting key documents is an important part of the due diligence process. The following is a list of common documents requested and reviewed:

  • Corporate documents, such as certificates of incorporation or bylaws
  • Financial statements
  • Market studies/reports on the sponsor’s product
  • Key tangibles, such as mortgages or title documents
  • Contracts, leases, agreements, and details on employee benefits plans and pensions
  • Insurance policies
  • Key information from sponsor management, such as financial and ownership information and litigation matters

Other key pieces of information will need to be gathered from outside sources, such as credit or background checks, title and lien searches, and certificates of good standing.

This list is by no means exhaustive. Any document that contributes to Broker Dealers being able to make complete, informed, and responsible decisions about the sponsor’s alternative investment offering should be collected and reviewed – ideally by a third party due diligence firm that will prepare an independent investment research report.

[1] Stanley Foster Reed and Alexandra Reed Lajoux. The Art of M&A, A Merger Acquisition Buyout Guide (Third Edition).

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John E. Moriarty, ChFC
December 2015
February 3, 2016

I have been in the financial services industry for 20 years and our firm provides an education platform that gets clients to “think differently” about their financial picture.  For many years we have communicated to clients the need to diversify their portfolios using alternative asset classes and more specifically, private non-traded investments.  Due diligence on these types of financial vehicles is essential and when I learned about Blue Vault in 2010, our firm immediately began using their material as a tool to build confidence in the minds of our advisors on which alternatives to recommend to clients.  I am impressed with the way Blue Vault continues to add value to their subscribers and I view their publication as a tremendous resource in today’s complex world.