Due Diligence Required in Complex & Alternative Investments - Transcript

Complex and alternative investments often present opportunities for higher returns but carry significant risks due to their intricate structures and lack of transparency. Unlike traditional market investments, these products require thorough due diligence by both brokers and brokerage firms to ensure they are in the best interests under Regulation Best Interest for investors. At Malecki Law, we help investors understand their rights and hold firms accountable when inadequate due diligence leads to financial losses.

Complex and alternative investments are not publicly traded securities like stocks or bonds that can be easily researched or evaluated by investors. Instead, these products often involve intricate structures, such as:

• Algorithms: Investment strategies driven by complex mathematical models.
• Tranches: Segmented portions of an investment product, often with varying levels of risk and return.
• Waterfalls: Payment structures that prioritize certain investors over others.

Examples of these investments include:

• Hedge funds
• Structured products
• Private placements
• Non-traded REITs

The complexity of these investments makes them difficult for the average investor to understand, increasing the importance of proper due diligence and risk disclosure by brokers and firms.

Both brokerage firms and individual brokers have critical roles in conducting due diligence for complex and alternative investments.

1. Firm-Level Due Diligence:
   • Product Evaluation: Firms must thoroughly evaluate the investment’s structure, risks, and potential benefits before allowing it to be sold to clients.
   • Training and Supervision: Firms are responsible for ensuring that brokers are adequately trained to understand the product and communicate its risks to investors.
   • Ongoing Oversight: Firms must supervise transactions involving these investments to ensure compliance with regulatory standards and protect investors from harm.
2. Broker-Level Due Diligence:
   • Understanding the Product: Brokers must fully understand the investment’s risks, structure, and objectives.
   • Assessing the Investor’s Profile: Brokers must ensure that the investment aligns with the client’s specific investor profile, including factors involving their financial goals, risk tolerance, and age.
   • Disclosing Risks: Brokers have a duty to clearly and accurately explain the risks of the investment to the client.

Failing to perform these duties can lead to significant financial harm for investors and potential liability for the brokers and firms involved.

Inadequate due diligence can have devastating consequences for investors. Common issues include:

• Misunderstanding of Risks: Investors may be unaware of the potential downsides or volatility of the investment.
• Client’s Best Interest: Complex and alternative investments may be recommended to clients who lack the financial sophistication or risk tolerance to handle them, meaning, it likely would not be in their best interest under Regulation Best Interest.
• Financial Losses: Poorly vetted investments can lead to significant losses for investors, particularly when market conditions change or the product underperforms.

When due diligence failures occur, brokerage firms and brokers may be held liable for the resulting losses. At Malecki Law, we work with investors to identify instances of inadequate due diligence and pursue claims to recover damages.

Investors can take steps to safeguard their interests when considering complex or alternative investments:

1. Ask Questions: Request detailed explanations about the investment’s structure, risks, and potential returns.
2. Request Documentation: Review any materials provided by the broker or firm, and ask for additional information if needed.
3. Consult a Professional: Consider seeking advice from an independent financial advisor or attorney to evaluate the investment’s suitability.
4. Monitor Your Portfolio: Stay vigilant about the performance and risks of your investments, and report any concerns to your broker or firm.

If you suspect that your broker or firm failed to conduct proper due diligence, consult a securities lawyer to evaluate your case and explore your options for recovery.

Due diligence is a critical safeguard for investors in complex and alternative products. If you’ve suffered financial losses due to a broker’s or firm’s failure to properly vet these investments, Malecki Law is here to help. Our experienced attorneys are dedicated to protecting investors and pursuing justice for financial misconduct. If you have questions for an experienced securities lawyer, reach out to Malecki Law to schedule a free consultation by calling 212-943-1233. We value your privacy and will ensure all communications remain confidential. Malecki Law is based in New York and represents clients across the world.

Transcript:

Because these are complex Investments due diligence in these cases are critical these are not Market Investments you can go on Yahoo finance and get the finances of the company and do your own research and figure it out and decide if you like that sector no these are usually Investments that involve algorithms and structuring and tranches and waterfalls and things that your average investor just doesn’t understand doesn’t have access to you know so due diligence in these types of Investments on the firm level and on the broker level are extremely important and firms allowing these Investments to be sold have to ensure that Brokers and advisors that are recommending these Investments have been appropriately trained to adequately describe the risks to the investors and that these transactions are adequately supervised so that the investors are not harmed along the way.