Roles That Shape the Scope of Investigation

Four roles change what "reasonable" requires: being affiliated with the issuer, preparing the offering document, hiring outside help, and belonging to a selling group led by another firm.

What Must an Affiliated Broker-Dealer Do Differently?

• An affiliated broker-dealer (BD) must ensure the affiliation does not compromise the independence of its investigation, and must resolve any conflict of interest that could impair a thorough and independent inquiry.
• Affiliation typically raises customer expectations, particularly among retail customers, that the firm has special expertise about the issuer. It also shapes the investigation itself: the scope of a required investigation depends on a number of factors, and the firm's affiliation with the issuer is one of them.

What Duty Applies to a BD That Prepares the Offering Document?

• A firm that prepares the private placement memorandum (PPM), or other offering document, has a duty to investigate both the securities offered and the issuer's representations made in that document.
• A PPM containing material misstatements or omissions, for example about the amount and timing of distributions or the targeted return of principal, can violate FINRA's requirement to observe just and equitable principles of trade.
• A PPM the firm helped prepare also counts as that firm's own communication with the public, so the content standards from the communications unit apply to it. Sales literature about a private placement that the firm distributes counts the same way, whether or not the firm helped write it.

Exam Tip: Gotchas

• Drafting the PPM does not lower the bar; it raises it. The firm now owns an investigation duty over its own document's claims, not just over the security generally.

Can a Firm Rely on Counsel or Outside Experts?

• A firm may retain counsel or other experts to help fulfill its investigation obligation, but it must carefully review the qualifications and competency of anyone it retains for that purpose.
• Using counsel or experts does not automatically complete the firm's investigation responsibilities. The firm must separately address any gaps or omissions in that work, and reviewing the expert's or counsel's report may itself surface issues that need further investigation.

When Can a Firm Rely on a Syndicate Manager?

A firm that is merely a member of a selling group may rely on a reasonable investigation performed by the syndicate manager, but only if both conditions hold:

• The firm has reason to believe the manager has the expertise and freedom from conflicts to perform a thorough, independent inquiry
• The manager actually performed that inquiry for this particular offering

A firm relying on a syndicate manager should meet with the manager, obtain a description of the manager's investigation efforts, and ask about the independence and thoroughness of that work.

A relying firm keeps its own responsibility for anything the syndicate manager's efforts do not address. If there is reason to believe the manager missed an issue that touches a participating firm's own suitability analysis, that firm remains responsible for it.

Exam Tip: Gotchas

• Relying on a syndicate manager is conditional, not automatic. The relying firm needs a reasoned basis for trusting the manager's work on this offering, and still owns any gap that the manager's investigation left open.

What Should You Check on Exam Day?

• Match the scenario's facts to the right role before answering: affiliated, drafting the PPM, hiring outside help, or relying on a syndicate manager.
• Confirm both syndicate-manager conditions are met (expertise and independence, plus actual performance on this offering) before treating reliance as valid.
• Remember that hiring counsel or an expert shifts work, not responsibility, back to the firm.
• Watch for a stem that assumes affiliation lets a firm investigate less. It raises customer expectations, and the scope of the required investigation depends on the affiliation as well.