Just as a client performs due diligence on a registered representative before engaging him or her, each broker-dealer must perform different types of due diligence in the course of its business. This can pose a particular burden for smaller firms, which often do not have the compliance staff necessary to conduct specific due diligence responsibilities. For example, a firm must perform appropriate due diligence on every product offered to clients, and must check out every new employee hired. To accomplish these tasks many firms are increasingly retaining third party providers to accomplish these services. While this type of outsourcing is permitted by FINRA, there are certain potential landmines that firms and compliance personnel must consider when delegating this important function. Simply put, any firm must be able to demonstrate that it has first conducted an appropriate due diligence review of its due diligence provider.
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