Welcome to Due Diligence and Feasibility Studies: the unit that tests whether you understand what a broker-dealer (BD) actually owes an investor before recommending a private placement, beyond simply passing along what the issuer says.
Exam Weight: 2 scored items within Function 1 (25 items / 50% of exam)
What You'll Learn
In this unit, you'll cover:
- The Reasonable Investigation Duty: why an exemption from registration is not an exemption from fraud liability, and how investigation depth affects a firm's legal exposure
- Scope of the Investigation and the Feasibility Question: what drives how much investigation is enough, the five-item minimum a firm should address, and what a feasibility study actually is
- The Five Components of Due Diligence: financial data, industry and operational data, management and employee relations, research, and product development and expansion
- Red Flags: what counts as a red flag, what it overrides, and how an issuer's own conduct can create one
- Roles That Shape the Scope of Investigation: how affiliation with the issuer, drafting the offering document, and relying on counsel or a syndicate manager change what a firm must do
- Documenting the Investigation: what a firm's records need to show to prove the investigation was reasonable
Why This Matters
Two scored items sounds small, but this unit tests the legal foundation underneath every private-placement recommendation a Series 82 representative makes. The exam rewards students who know that a private placement is regulated differently than a registered offering, not left unregulated.
- Exam questions like to test the trap that a wealthy or sophisticated customer base substitutes for the firm's own investigation. It does not.
- Questions also test who bears responsibility when a firm leans on an issuer, on counsel, or on another firm's work instead of doing its own digging.
Let's start with the legal basis for the reasonable investigation duty.