Welcome to Due Diligence Activities: the third unit of Function 1 and the workstream that protects bankers from securities liability and protects buyers from buying problems they didn't price. Due diligence (DD) is the structured investigation a banker runs to confirm the facts behind every disclosure in an offering document or M&A agreement.
Exam Weight: Part of 49% / 37 items (Function 1)
Video Resources
What You'll Learn
In this unit, you'll cover:
- Disclosure Standard and the Reasonable-Investigation Defense: The Securities Act standard that offering documents shall not contain an untrue statement of material fact or omit a material fact necessary to make the statements not misleading, the scope of the banker's review of the issuer's business (financials, business plan, management interviews, third-party interviews, site visits), bring-down DD at closing, and the situational factors that determine whether an underwriter conducted a reasonable investigation
- Sell-Side Due Diligence Process: Financial DD on the seller, assistance preparing materials for buyers, data room setup and management (indexing, supplemental information, access monitoring), and reverse DD on the potential buyers themselves
- Buy-Side Due Diligence Process: Coordination of management presentations, data room access, and site visits, plus the six substantive areas the buy-side banker facilitates (HR and benefits, negotiating positions, leadership evaluation with background checks, culture and governance and labor, risk discovery for off-balance-sheet and unfunded liabilities, and cost-saving opportunities), and DD from sources other than the target
- Sell-Side vs Buy-Side Side-by-Side: How each workstream looks different from the seller's chair versus the buyer's chair across financial DD, data room handling, presentations, site visits, reverse DD, background checks, risk discovery, and cost savings
- Sarbanes-Oxley DD Checkpoints: The SOX Title IV Enhanced Financial Disclosures regime, the ban on personal loans by the issuer to directors and executive officers, the 2-business-day insider Form 4 deadline, and the dual ICFR (internal control over financial reporting) requirement for both management's assessment and the auditor's attestation
Why This Matters
Due diligence sits between the data-gathering work of Unit 1 and the valuation analysis of Unit 2 and decides whether the deal narrative actually holds up.
The Series 79 tests DD as a sequence of duties:
- What bankers must investigate to support the registration statement (the disclosure standard and the reasonable-investigation defense)
- What sell-side bankers do to prepare a target for sale (data room mechanics and reverse DD on bidders)
- What buy-side bankers must surface for an acquirer (six substantive areas including off-balance-sheet items and unfunded pension liabilities)
- What SOX-driven checkpoints sit inside any DD review of a public-company target (no insider loans, 2-business-day insider Form 4 deadline, dual ICFR assertions)
Let's start with the legal anchor: the disclosure standard that every DD workstream is built to defend.