FINRA Reminds Members of Their Obligations When Selling Private Placements

Summary

In this Notice, FINRA reminds members of their obligations when selling private placements (i.e., unregistered offerings sold pursuant to the Regulation D safe harbors under Sections 3 and 4 of the Securities Act of 1933 (Securities Act)). In Regulatory Notice 10-22 (Obligation of Broker-Dealers to Conduct Reasonable Investigations in Regulation D Offerings), FINRA reminded members of their obligations to conduct reasonable investigations of the issuers and the securities they recommend in private offerings made under Regulation D. In the years since FINRA published Regulatory Notice 10-22, the unregistered offering market and the related regulatory landscape have evolved, and FINRA has observed both areas of concern and effective practices in the sales of private placements by members. This Notice updates and supplements the prior guidance in light of those developments and observations. It is not intended to alter the principles or the guidance FINRA provided in prior Regulatory Notices. 

This Notice highlights a member’s obligation, when recommending a security, to conduct a reasonable investigation of the security. This duty has long been rooted in the antifraud provisions of the federal securities laws and is a core component of a broker-dealer’s obligations under Securities and Exchange Commission (SEC) Regulation Best Interest (Reg BI) and FINRA Rule 2111 (Suitability), the fundamental standards that members must meet when recommending securities.¹ This Notice also addresses certain additional obligations for members when selling private placements, including FINRA’s filing requirements and its communications with the public and supervision rules.

This Notice does not create new legal or regulatory requirements or new interpretations of existing requirements, nor does it relieve firms of any existing obligations under federal securities laws and regulations. Members may consider the information in this Notice in developing new, or modifying existing, practices that are reasonably designed to achieve compliance with relevant regulatory obligations based on the member’s size and business model. 

FINRA notes that it is issuing a companion notice, Regulatory Notice 23-09, requesting comment on whether changes to FINRA rules, operations or administrative processes would enhance the capital-raising process without compromising protections for investors and issuers.² FINRA encourages members to provide feedback pursuant to that Notice.

Questions regarding this Notice should be directed to:

• Minh Le, Senior Director, Corporate Financing, by email or (240) 386-4638;
• Janet Boysen, Associate Director & Counsel, Corporate Financing, by email or (240) 386-5101;
• James S. Wrona, Vice President and Associate General Counsel, Office of General Counsel (OGC), by email or (202) 728-8270;
• Matthew Vitek, Associate General Counsel, OGC, by email or (240) 386-6490;
• Alicia Goldin, Associate General Counsel, OGC, by email or (202) 728-8155;
• Scott Maestri, Examination Director, Member Supervision, at by email or (972) 716-7634; or
• Bennett Podolsky, Manager, Corporate Financing, by email or (240) 386-5125.

Background and Discussion

Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the SEC or an exemption from registration is available.³ Private placements are unregistered, non-public securities offerings that rely on an available exemption from registration with the SEC under either Section 3 or 4 of the Securities Act.⁴ This Notice principally focuses on private placements sold pursuant to the Regulation D safe harbors under Sections 3 and 4 of the Securities Act (i.e., Rules 504, 506(b) and 506(c)).⁵

Part I of this Notice provides an overview of developments in the unregistered offering market generally. Part II discusses members’ regulatory requirements when participating in private placements. It focuses primarily on members’ critical role, when recommending private placements, in performing reasonable investigations under the reasonable basis obligations of Reg BI, the suitability rule and caselaw interpreting the antifraud provisions of the federal securities laws. Part II also examines key member obligations applicable to private placement activity irrespective of whether recommendations are involved. For instance, Part II discusses FINRA’s filing requirements for private placement memoranda (PPMs) and related documents, as well as FINRA’s communications with the public and supervision rules, including the duty to investigate and act upon “red flags” revealing irregularities or potential misconduct.

Part III discusses practices FINRA has observed since Regulatory Notice 10-22 was published that members have adopted to address their reasonable investigation obligations and related supervisory obligations when recommending private placements. These practices are examples of potentially effective measures for compliance with regulatory requirements that FINRA has observed in private placement examinations and through feedback provided by members in a recent private placement survey.⁶ They add to those practices highlighted in Regulatory Notice 10-22.

I. Developments in Unregistered Offerings

The unregistered offering market is an important source of capital for American businesses, including small and midsize companies. In recent years, the unregistered offering market outpaced the public market. According to SEC analysis, in 2019, 69 percent of new capital ($2.7 trillion) was raised through unregistered offerings, compared to 31 percent ($1.2 trillion) through registered public offerings.⁷ The amount of capital raised in Regulation D offerings alone more than doubled from 2009 to 2019.⁸

The majority of Regulation D offerings are sold directly by issuers without any broker-dealer involvement. Approximately 20 percent of Regulation D offerings involve “intermediaries,” such as broker-dealers.⁹ Thus, only a small percentage of investors in private placements are afforded the protections of FINRA rules and other relevant broker-dealer regulations that apply when a Regulation D offering involves a member.

However, member involvement in private placements has kept pace with the growth of the Regulation D market in general. In 2021, for example, members submitted over 3,800 unique filings for private placements pursuant to FINRA Rules 5122 and 5123, which require filings for private placements generally sold to individuals, in comparison to roughly 2,000 submissions in 2013.¹⁰

The growth of the unregistered market is due in part to legislative and regulatory developments that reduced barriers to capital formation. The Jumpstart Our Business Startups (JOBS) Act of 2012 required the SEC to eliminate the prohibition on general solicitation in Rule 506 offerings under Regulation D, lifting a significant restriction on the manner in which a private offering may be sold, among other initiatives to promote capital formation.¹¹ In recent years, the SEC also revised its rules to facilitate intrastate offerings, increased the offering limits for certain exempt offerings and established consistent guidelines across the exempt offering framework.¹² These measures were part of a larger effort by the SEC and Congress to reduce restrictions and provide issuers with capital-raising alternatives to public offerings.¹³ 

While these changes and the growth of the unregistered offering market have increased funding opportunities for issuers (in particular, small and midsize businesses) and investment options for investors, private offerings may present certain risks to investors. These risks include, for many private placements, their illiquid nature, the lack of access to comprehensive information with which to value the securities or a transparent market to set the market price, the absence of substantial operating histories, and the lack of independently audited financial statements.  

In contemplation of such risks, the SEC and Congress also imposed measures to reduce risk to investors in recent years. These include, among other things, adopting “bad actor” disqualification provisions¹⁴ and requiring verification of accredited investor status for offerings that involve general solicitation.¹⁵ In addition, as discussed below, with the adoption of Reg BI, the SEC enhanced the broker-dealer standard of conduct beyond existing suitability obligations and imposed new investor protection obligations on members and their associated persons when they recommend securities, including private placements, to retail customers.   

II. Member Regulatory Requirements for Private Placements

Members that participate in private placements are subject to important regulatory obligations that help ensure the protection of investors and maintain confidence in the marketplace, thereby ultimately benefiting capital formation. While key obligations are highlighted below, depending on the facts and circumstances, additional requirements could apply.¹⁶  

A. Requirements Applicable When Recommending Private Placements—Best Interest and Suitability

Among the regulatory developments since the publication of Regulatory Notice 10-22 was the SEC’s adoption of Reg BI, which requires a member or associated person, when making a recommendation¹⁷ of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer,¹⁸ to act in the best interest of the retail customer without placing the financial or other interest of the member or associated person ahead of the interest of the retail customer.¹⁹ This general obligation is satisfied only by complying with four specified component obligations: the Care Obligation, the Disclosure Obligation, the Conflict of Interest Obligation and the Compliance Obligation. 

Reg BI’s Care Obligation incorporates and builds on broker-dealers’ longstanding suitability obligations, and like FINRA Rule 2111 (Suitability), it includes reasonable basis, customer specific and quantitative components.²⁰ Members and their associated persons must comply with Reg BI when recommending private placements to retail customers, and with FINRA Rule 2111 when recommending private placements to non-retail customers. 

Reasonable Basis Obligations and the Duty to Conduct a Reasonable Investigation

FINRA Rule 2111 and Reg BI each require a member or associated person that recommends a private placement to have a reasonable basis for that recommendation. 

FINRA’s reasonable basis obligation requires a member or associated person, when recommending a security, to perform reasonable diligence to understand the nature of the security, as well as the potential risks and rewards, and to determine whether the recommendation is suitable for at least some customers based on that understanding.²¹

Similarly, the SEC’s Reg BI Care Obligation requires that the member or associated person undertake reasonable diligence, care and skill to understand the nature of the recommended security or investment strategy involving a security—as well as the potential risks, rewards and costs²² of the recommended security or investment strategy—and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers based on that understanding.²³ 

To fulfill these reasonable basis obligations, a member or associated person must conduct a reasonable investigation of any security or investment strategy involving a security it recommends.²⁴ This duty, which also has long been recognized by the SEC and federal courts under the antifraud provisions of the federal securities laws,²⁵ originally emanated from the broker’s “special relationship” to the customer and from the fact that, in recommending the security, the broker represents to the customer “that a reasonable investigation has been made and that [its] recommendation rests on the conclusions based on such investigation.”²⁶ 

What constitutes a reasonable investigation depends on the facts and circumstances.²⁷ As the duty has been applied under the antifraud provisions, certain guiding principles have emerged.²⁸ Courts have found that the amount and nature of the investigation required depends, among other factors, upon the nature of the recommendation, the role of the broker in the transaction, its knowledge of and relationship to the issuer, and the size and stability of the issuer.²⁹ For example, a more thorough investigation is required for “securities issued by smaller companies of recent origin,”³⁰ which could include many private placement issuers.  There is no hard and fast rule as to what a broker must do to meet this responsibility, but the presence of “red flags” should alert the broker to the need for further inquiry.³¹ 

Regulatory Notice 10-22 explained that a member or associated person recommending a private placement should, at a minimum, conduct a reasonable investigation concerning:

• the issuer and its management;
• the business prospects of the issuer;
• the assets held by or to be acquired by the issuer;
• the claims being made; and
• the intended use of proceeds of the offering.³²

While these areas of review continue to be essential to a reasonable investigation, since FINRA published Regulatory Notice 10-22, FINRA has observed, through its examinations³³ and disciplinary actions,³⁴ other areas in which some members’ investigations into private placements could be strengthened. Based on these observations, as part of a reasonable investigation of a private placement, members should also consider addressing, where relevant, the following:

• Regulatory and litigation history of the issuer and its management, including the criminal, disciplinary, regulatory, and litigation history associated with the issuer, its management, and any affiliate that may be materially involved in the issuer’s business, as well as the issuer’s compliance with the bad actor provisions under Rule 506(d)–(e).³⁵
• New material developments, including events that are or should be reasonably known to the member during an offering, for example, when there are ongoing legal proceedings or regulatory inquiries involving the issuer.
• Transactions or payments between an issuer and the issuer’s affiliates involving offering proceeds, including the terms of the transaction between the related parties and whether an arrangement presents a material conflict of interest for the issuer and, if so, the sufficiency of disclosure.
• Representations of past performance of the issuer, its sponsor, or its manager to identify any such representations that may be misleading or exclusively selected based on positive results (or “cherry-picking”). This is particularly important when the representations pertain to specific prior issuances.

While members are not expected to have the same knowledge as an issuer or its management, FINRA reminds members of the importance of conducting a reasonable investigation that independently verifies an issuer’s material representations and claims, particularly when the member or its associated persons are affiliated with the issuer or when red flags are present.³⁶ A member’s independent analysis of the offering should not rely solely upon representations made by the issuer or its affiliates.

Often, members rely on information provided by a third party hired by the member or the issuer. Appraisers, attorneys and due diligence experts may provide valuable assistance to a member in fulfilling its reasonable investigation obligations. However, the member should review the information from these sources with reasonable care, considering the independence, incentives and qualifications of the third party.³⁷ This is particularly important with regard to third parties hired by the issuer.³⁸  

A member may demonstrate that it has conducted a reasonable, independent investigation by:

• Documenting the inquiries, research, and analysis that the member conducted.
• Obtaining additional information from an issuer, such as primary documents, to perform an independent analysis of issuer representations.³⁹ For example, if the PPM contains a representation concerning the contracts or permits the issuer has in place, a reasonable independent review may involve obtaining and reviewing copies of the contracts or permits.⁴⁰
• Critically analyzing third-party due diligence reports. When a member encounters red flags through its own review, the member must address those issues prior to recommending the offering.⁴¹ For instance, where a due diligence report contains inconsistencies or inadequately addresses potential concerns, a member should obtain a more thorough explanation of the issue from the source of the report or by independently researching the matter.⁴²

FINRA also cautions members to consider the impact an issuer’s timeline for the offering may have on the quality or thoroughness of the member’s reasonable investigation. For example, it may raise a concern if an issuer or managing members condition a selling member’s participation in the offering on a selling schedule that does not accommodate sufficient time for the member to complete a reasonable investigation.

Finally, while in practice members often take on the operational responsibility for gathering and analyzing reasonable investigation materials to approve an offering, associated persons should be mindful that they, themselves, have an independent obligation to satisfy Reg BI or Rule 2111 when making recommendations.⁴³

Customer-Specific Obligations

When members or associated persons recommend a private placement, they also have customer-specific obligations under FINRA’s suitability rule and Reg BI’s Care Obligation.⁴⁴ 

Under FINRA Rule 2111, the customer-specific obligation requires that a member or associated person have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer's investment profile.⁴⁵ Rule 2111(b) provides an exemption to customer-specific suitability regarding institutional investors only if certain conditions are satisfied relating to the investors’ capability to evaluate the risks, and the investors affirmatively indicating that they are exercising independent judgment.⁴⁶ 

The customer specific component of Reg BI’s Care Obligation requires the member or associated person to exercise reasonable diligence, care and skill to have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards and costs associated with the recommendation and does not place the financial or other interest of the member or associated person ahead of the interest of the retail customer.⁴⁷

As part of this requirement under Reg BI, members must obtain and analyze enough customer information to have a reasonable basis to believe that the recommendation is in the best interest of the particular retail customer. Where retail customer information is unavailable despite a member’s reasonable diligence, the member should carefully consider whether it has a sufficient understanding of the retail customer to properly evaluate whether the recommendation is in the best interest of that retail customer.⁴⁸

SEC staff guidance under Reg BI concerning risky or complex products (including private placements) provides that members and their financial professionals generally should apply heightened scrutiny to whether a risky or complex product is in the retail customer’s best interest.⁴⁹ Among the relevant considerations when recommending such a product is whether the retail customer “has an identified, investor-specific trading objective that is consistent with the product’s description in its prospectus or offering documents, and/or has the ability to withstand heightened risk of financial loss.”⁵⁰  

In addition, a member or associated person should consider “reasonably available alternatives” offered by the member as part of having a “reasonable basis to believe” that the recommendation is in the best interest of the retail customer.⁵¹ For complex or risky products (including private placements), this involves considering whether lower risk or less complex options can achieve the same investment objectives.⁵²

Other Reg BI Component Obligations

As noted above, Reg BI’s general obligation is satisfied only by complying with four specified component obligations. In addition to the Care Obligation, Reg BI also has the following component obligations: Disclosure, Conflict of Interest and Compliance.

The Disclosure Obligation requires the member or associated person, prior to or at the time of the recommendation, to provide the retail customer, in writing, full and fair disclosure of all material facts relating to the scope and terms of the relationship with the retail customer and all material facts relating to conflicts of interest that are associated with the recommendation.⁵³ Material facts relating to the scope and terms of the relationship with the retail customer that must be disclosed include, but are not limited to: (1) the capacity in which the broker-dealer is acting; (2) the material fees and costs that apply to the retail customer’s transactions, holdings and accounts; and (3) the type and scope of services provided to the retail customer, including any material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer.  Importantly, disclosure of conflicts of interests alone does not satisfy the obligation to act in the retail customer’s best interest.⁵⁴ 

The Conflict of Interest Obligation requires a member to identify and address conflicts of interest that may incline the member or its associated persons—consciously or unconsciously—to make a recommendation that is not disinterested.⁵⁵ Specifically, members must establish, maintain and enforce written policies and procedures reasonably designed to:

• identify and at a minimum disclose, pursuant to the Disclosure Obligation, or eliminate, all conflicts of interest associated with recommendations;
• identify and mitigate any conflicts of interest associated with recommendations that create an incentive for the member’s associated persons to place their interest or the interest of the member ahead of the retail customer’s interest;
• identify and disclose any material limitations (e.g., a limited product menu) placed on the securities or investment strategies involving securities that may be recommended to a retail customer and any conflicts of interest associated with such limitations and prevent such limitations and associated conflicts of interest from causing the member or the associated person to make recommendations that place the interest of the member or the associated person ahead of the retail customer’s interest;⁵⁶ and
• identify and eliminate sales contests, sales quotas, bonuses and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.

This process “should not be merely a ‘check-the-box’ exercise, but a robust, ongoing process that is tailored to each conflict[,]” including those regarding relationships with affiliates or third parties.⁵⁷

Conflicts may be of particular concern when members recommend to retail customers private placements of securities issued by an affiliated company. However, even where the securities are not issued by an affiliated company, conflicts can arise from a close relationship with the issuer, including when a member engages in other activities for or with the issuer or when an associated person separately may be connected to the issuer. Moreover, there are conflicts inherent in any recommendation of securities, including private placements, based on the potential or actual receipt of compensation, revenue or other benefits (financial or otherwise) that must be addressed in accordance with the rule.⁵⁸   

Finally, under the Compliance Obligation, a broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.⁵⁹ SEC staff guidance concerning complex and risky products (including private placements) suggests, among other things, that firms should consider developing procedures outlining the due diligence process for complex or risky financial products to help ensure that these products are assessed by qualified and experienced firm personnel, and should consider establishing procedures requiring appropriate training and supervision to help ensure financial professionals understand the features, risks and costs of a complex financial product.⁶⁰ The guidance suggests, moreover, that members should consider documenting the process and reasoning behind particular recommendations of complex or risky products, including consideration of less complex alternatives, and how it fits within the retail customer's broader goals or strategy.⁶¹

Of course, even if a member complies with its Disclosure, Conflict of Interest, and Compliance Obligations, “it has not fully complied with Reg BI unless it has also satisfied the Care Obligation,” discussed above, including the requirement “to have a reasonable basis to believe that each recommendation or series of recommendations made is in the best interest of the particular retail customer and does not place their financial or other interests ahead of the interest of the retail customer.”⁶² For example, some members that offer private placements may materially limit their product offerings. FINRA reminds such members that even if they have disclosed and taken steps to prevent the limitation from placing the interests of the member ahead of the retail customer, as required by the Disclosure and Conflict of Interest Obligations, they cannot use their limited menu to justify recommending a private placement that does not satisfy the obligation to act in a retail customer’s best interest.⁶³  

B. Other Requirements Applicable to Private Placements 

Members are subject to important obligations even in the absence of a recommendation. Some key requirements for members and associated persons engaged in private placement activities are highlighted below. Members and associated persons should keep in mind, however, that this list is not exhaustive.  

Communications with the Public

Under FINRA rules, offering materials will be considered a communication with the public for purposes of FINRA Rule 2210 (Communications with the Public) if the member was involved in preparing the materials. If a PPM or other offering document presents information that is not fair and balanced or that is misleading, then the member that assisted in its preparation may be found to have violated FINRA Rule 2210.⁶⁴ Moreover, sales literature concerning a private placement that a member distributes generally constitutes a communication by that member with the public, whether or not the member assisted in its preparation.⁶⁵ In 2020, FINRA published Regulatory Notice 20-21 to help member firms comply with FINRA Rule 2210 when creating, reviewing, approving, distributing or using retail communications concerning private placement offerings. 

FINRA has brought enforcement actions under the federal securities laws and FINRA rules against members and associated persons in matters involving private offerings containing materially misleading information.⁶⁶ In one case, for example, a FINRA hearing panel found that a member affiliated with the issuer helped prepare the PPM and, because of its inside knowledge, had the ability to approximately calculate the issuer’s costs related to drilling operations.⁶⁷ The panel found the member violated Securities Exchange Act of 1934 (Exchange Act) Rule 10b-5 and FINRA Rule 2020 for recommending a private placement using a PPM that inaccurately stated that the costs related to the drilling operations could not be reasonably predicted.⁶⁸

Private Placement Filings with FINRA

FINRA Rule 5122 imposes disclosure and filing requirements for members that sell a private placement of securities issued by a member or a control entity.⁶⁹ Its companion rule, FINRA Rule 5123, requires members that sell any other type of private placement to file a copy of any offering documents with FINRA within 15 calendar days of the first sale, subject to various exemptions.⁷⁰ Both Rules 5122 and 5123 require filings to include retail communications used by the member that promote or recommend the private placement.⁷¹   

Pursuant to Rules 5122 and 5123, FINRA requires members to submit a form that contains information about the member selling the private placement securities, the issuer and the offering terms as well as any offering documents, if applicable, electronically through the FINRA Gateway (the Filer Form). FINRA uses the information in the Filer Form to conduct oversight on particular areas of risk in the private placement market and enhance investor protection.

Supervision

Under FINRA Rule 3110, a member must establish and maintain a system to supervise the activities of each associated person, and must establish, maintain and enforce written procedures to supervise the types of business in which it engages and the activities of its associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with FINRA rules.⁷² In the context of private placements, these procedures must be reasonably designed to ensure that each private placement offering is properly supervised before it is marketed to other members or sold directly to customers.⁷³  Moreover, as has long been the case under Rule 3110 (and its predecessor), if a member were faced with “red flags” revealing irregularities or potential misconduct, including with regard to private placements, the member must investigate and act upon them.⁷⁴

To meet their supervisory obligations, members may need to periodically update their written supervisory procedures, supervisory systems and training programs to keep pace with regulatory and business developments.⁷⁵ For example, members may need to update their procedures to incorporate SEC staff guidance on Reg BI,⁷⁶ changes to the member’s business activities and customer base or to strengthen practices in areas of known concern.

Private Securities Transactions

At times, private placements are sold by an associated person outside of his or her relationship with the member. These are considered to be private securities transactions (PSTs). FINRA Rule 3280 requires that the associated person provide written notice to and receive written approval from the member when the transaction involves selling compensation. If the member approves a person’s participation in the PST for compensation, the transaction must be recorded on the books and records of the member and the member must supervise the person’s participation in the transaction as if the transaction were executed on behalf of the member. When recommending a private placement security in a PST to a retail customer, the associated person also must comply with the rules applicable to recommendations of securities, including Reg BI.  

III. Effective Practices Relating to Reasonable Investigation and Related Supervisory Practices

A member’s reasonable investigation of a recommended private placement will yield an understanding of the issuer and its prospects and reflect the member’s reasonable analysis of the offering documents and the representations made to customers. Regulatory Notice 10-22 provides examples of practices that some members adopted to help them adequately discharge their responsibilities in these areas. FINRA has observed the following additional practices from its private placement examination findings and through feedback received from its survey of members.⁷⁷

A.  Offering-Specific Investigations

A member’s process for conducting a reasonable investigation of a private placement should include attention to the unique facts and circumstances of the offering. A reasonable investigation process might include:

• Reviewing the offering terms to determine if they are reasonably structured for compliance with applicable rules. For example, analyzing the escrow arrangements and termination provisions in contingency offerings as required under Rules 10b-9 and 15c2-4 of the Exchange Act.⁷⁸  
• Maintaining contact with the issuer. The vast majority of members surveyed stated that as a matter of practice they always or frequently maintain regular contact with the issuer to obtain updates on developments.
• Applying a heightened analysis when recommending an investment that involves complex features or unique benefits to investors. For example, where potential tax benefits are a critical component of an investment, many members take additional steps to understand the relevant tax requirements, the risks associated with the complex tax strategies, legal implications, valuation methodologies, or other unique factors.⁷⁹
• Maintaining an updated due diligence file, for example, when recommending securities in follow-on offerings by the same issuer or sponsor in order to have a reasonable basis to recommend the current offering. Consistent with previous guidance in Regulatory Notice 10-22, members often retain records documenting both the process and results of the updated investigation.  

B. Supervision of the Reasonable Investigation Process

To maintain adequate supervision of its private placement reasonable investigations under FINRA Rule 3110, or to meet the requirements of Reg BI’s Compliance Obligation, members’ procedures might include:

• When using a checklist, ensuring it is reasonably designed to address the private placement, requirements for filing and related documentation, assignment of staff responsible for performing functions and tasks, and evidence of supervisory approval for the reasonable investigation process.
• Assigning responsibility for the member’s private placement reasonable investigation and compliance with filing requirements to specific individual(s) or team(s) and conducting targeted, in-depth training about the firms’ policies, process and filing requirements.
• Creating a system that alerts responsible individual(s) and supervisor(s) about upcoming and missed filing deadlines.
• Requiring documentation of the process, completeness, and results of its investigations and retention of documents collected through due diligence. Some firms, for example, include descriptions of the meetings that were conducted in the course of the investigation, such as meetings with the issuer or other parties, the tasks performed, the documents and other information reviewed, the results of such reviews, the date such events occurred, and the individuals who attended the meetings or conducted the reviews. Firms also document efforts to evaluate potential red flags and risk factors that they identified in the course of the investigation.   
• Implementing standards for the reasonable investigation process that specifically address certain types of offerings sold by the member. For example, members that routinely engage in offerings that are particularly complex or risky may create guidelines to help ensure that the security is not recommended to customers whose investment profiles may not align with the security’s characteristics.
• Taking steps to ensure that the member’s sale of an offering does not precede the completion of its reasonable investigation.

IV. Conclusion

As the private placement market has evolved and grown in recent years, members have continued to play an important role in providing an essential source of capital for American businesses, while promoting the integrity of the offering process and protecting investors. This Notice discusses key requirements for members that engage in private placement activity, including obligations adopted after FINRA issued Regulatory Notice 10-22. Based on private placement examinations and feedback provided by members, this Notice also highlights potentially effective practices by members to comply with regulatory and legal requirements. Members may wish to consider the information in this Notice in developing new, or modifying existing, practices that are reasonably designed to achieve compliance with relevant regulatory obligations based on the member firm’s size and business model.