Category Archives: Due Diligence

Essential Documents in the Due Diligence Process

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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Getting Started with the Due Diligence Process

Getting Started with the Due Diligence Process

September 16, 2016 | by Beth Glavosek, in collaboration with Alan Royalty and Scott Brown | Blue Vault and Blue Vault Due Diligence Services

businessman is analyzing through magnifying glass contract and

In a previous blog post, we highlighted the importance of using due diligence to make informed decisions. For Independent Broker Dealers in particular, due diligence is a critical function in the investment selection process.

So, let’s say that there’s a new alternative investment product offering from a product sponsor. How do Broker Dealers get started with the due diligence process of evaluating the offering, and what are the first steps?

  1. Broker Dealers initiate the process. When Broker Dealers are interested in considering a particular alternative investment product offering, they require the product sponsor to utilize a third-party due diligence firm like Blue Vault Due Diligence Services as a tool to assist them in evaluating the sponsored investment product. In some cases, the Broker Dealers engage the third-party due diligence firm directly, while in other cases, a product sponsor engages the firm to perform due diligence for the benefit of Broker Dealers.
  2. The process usually kicks off with an introductory conference call. During this call, a Broker Dealer and/or a third-party due diligence firm may review a list of documents or information requested from the sponsor’s due diligence team. This call usually takes place a few weeks before the Broker Dealer and/or third-party due diligence firm is planning to make an on-site visit to the sponsor. At this time, a third-party firm can provide valuable assistance in determining what information to ask for and collecting the data requested.
  3. The on-site visit will then be scheduled. It’s critical to make sure that the sponsor’s executives and key personnel will be available and accessible during this visit.
  4. After the on-site visit is complete, it’s time for the third-party firm to prepare a due diligence report for the Broker Dealers. Blue Vault Due Diligence Services performs this function for its Broker Dealer clients. There will, undoubtedly, be follow-up questions and additional information requests for the sponsor as the report is drafted, and the third-party due diligence firm streamlines this process.
  5. The last step is issuing the completed due diligence report. Blue Vault Due Diligence Services typically schedules a conference call with the sponsor’s due diligence team once the report is ready to be finalized. The call reviews the report’s executive summary, strengths and weaknesses, and particular points with the sponsor’s due diligence team in order to ensure factual accuracy.

Once this call has been completed, any necessary resulting changes or edits are made to the due diligence report, and it is ready for issuance to Broker Dealer clients.

In future posts, we’ll discuss other aspects of the due diligence process and best practices that are mutually beneficial to the Broker Dealer, product sponsor, and third-party due diligence relationship.


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Due Diligence Basics, posted on September 9, 2016

 

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Due Diligence Basics


Due Diligence Basics

The first in a series of blog posts and other educational content produced as a collaboration with Blue Vault Staff writer, Beth Glavosek, and Blue Vault Due Diligence partners, Alan Royalty and Scott Brown.

Due Diligence on Ring Binder. Blured, Toned Image.

September 9, 2016 | By Beth Glavosek | Blue Vault

According to Merriam-Webster, the term ‘due diligence’ has been used since at least the 15th century to mean putting forth a requisite effort to gather information in a prudent fashion. “Doing your due diligence” means that you’ve put reasonable care into avoiding harm when making an important decision.

Through the years, due diligence has taken on special significance in legal and business contexts, as the term applies to research one might perform before engaging in a financial transaction or making a purchase.

In the world of investments, due diligence is particularly necessary in order to gain confidence in the stability and integrity of a product sponsor and its offerings. In securities law, due diligence describes the duty of care and review to be exercised in connection with evaluating public offerings of securities.[1] For example, the officers, directors, underwriters, and other leadership of Independent Broker Dealers perform due diligence on product offerings they’re considering making available to investors.

Authors Stanley Foster Reed and Alexandra Reed Lajoux offer a rather poetic description of the importance of due diligence:

“Due diligence – the search to discover hidden defects and risks – restrains the desire to see the best in each other…and it should. To ensure a lasting union, due diligence must arrive on the scene early and linger long, getting behind the reflected surface of things, looking for signs of trouble, asking always ‘What if?’ Without such deep, dark searching, there can be no true light or clarity that can help all parties move forward with mutual confidence from idea to reality.”

However, with the proliferation of today’s investment choices, it can be daunting to perform in-depth analysis of the industry. Independent Broker Dealers often utilize a third-party due diligence firm as a tool to assist them in evaluating product sponsors of alternative investment offerings,” says Alan Royalty, a Managing Partner for Blue Vault Due Diligence Services (BVDDS). “An unbiased investment research report produced by a third-party due diligence firm like BVDDS is an invaluable, time-saving resource that can provide great peace of mind as these busy firms are gathering information on many different products.”

In upcoming blog posts, we’ll take a closer look at which documents should be requested and examined during due diligence for a product sponsor, as well as best practices and processes.

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

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