DOL Deconstructed: Regulations, Guidance, and Suggestions on Documenting Diligence

Tuesday, March 14th, 2017 and is filed under AI Insight News

The first in a series of bite-sized articles on the DOL fiduciary rule.

With all of the uncertainty around whether the DOL’s conflict of interest rule will be implemented and maintained as a whole, it is important to look at some of the central themes of the ruling, which we believe are generally good practices for advisors and broker dealers to protect themselves regardless of the DOL’s final outcome. The first of these is documentation. In this brief article, we will discuss the current regulation and guidance around alternative investment documentation and then provide suggestions on what you can do to comply.

Some Key Language from the Regulation and Guidance

DOL Fiduciary Rule (Client Interactions): Broker dealers, financial advisors and registered investment advisors (RIAs) “must document why recommendations were in a client’s best interest,” including, but not limited to, the type of account used, the products that are recommended, and why the recommendation was in the client’s best interest at the time it was made.  Read more here.

NASD Notice to Members 03-71 (Non-Conventional Investments): In addition to establishing written procedures for supervisory and compliance personnel, “members must also document the steps they have taken to ensure adherence to these procedures.” Read the full notice here.

FINRA Regulatory Notice 10-22 (Regulation D Offerings): In order to demonstrate that it has performed a reasonable investigation, a BD “should retain records documenting both the process and the results of its investigation of Reg D offerings.” Read the full notice here.

What to Document in Alternative Investments Due Diligence?

  • The Process: Document your process for identifying alternative investment opportunities. Keep a file of the list of any and all sectors, asset classes, products and managers reviewed. AI Insight Tip: Keep a log of any screens you have run to narrow the universe of investment opportunities available to your clients, as well as a log of any training or education you have completed while conducting your research.
  • Characteristics, Risks and Rewards: Ensure documentation of how you are educating yourself on the strategies considered. Most importantly, you’ll want to document your review of a product’s investment characteristics, its key risks and rewards, and how management intends to meet the product’s objectives. Keep an initial file and ensure you have a way to track the most up-to-date key documents and interviews with managers. Key documents include the offering documents, performance information, brochures, quarterly/annual reports, ADVs, and any other available data. AI Insight Tip: Try to meet or speak with key decision-making personnel for the investment manager if possible and have them explain how they intend to meet their stated investment objectives.
  • Operational Due Diligence and Analysis: Document your audit of a firm’s operational structure, adherence to compliance requirements, background checks, and any red flags that may arise. Many advisors and broker-dealers rely on third party due diligence providers for this step. AI Insight Tip: While it is common for third-party diligence firms to be utilized for this important step in the due diligence process, it is important to remember that you may not rely solely on a third party for due diligence. You must be familiar with the content of any third-party reports and any red flags highlighted in these reports. Document the follow-up on red flags and any conclusions.
  • Ongoing Monitoring: Due diligence does not stop with an initial review. It is important to remember that a sound due diligence process means continually performing analysis on each manager, updating your key documents on a quarterly basis, conducting formal meetings, and monitoring the portfolio for any changes or red flags. AI Insight Tip: Document any and all ongoing due diligence and ensure you are set up to receive notices of important events for alternative investment programs and managers. Read more about AI Insights’ ongoing monitoring capabilities here.


Save hard copies, use electronic storage and/or consider using a third party to track training and education, due diligence, research and compliance. Keep an easily accessible trail of your due diligence efforts, whether electronically or on paper, to demonstrate what you have done, including not only the results of your due diligence but the process you followed.[1]  Remember, if it isn’t documented, it didn’t happen!

[1] SEC Rules17a-3 and 17a-4: During the first two years, records must be kept in a readily accessible place. Most documents must be kept for up to six years, depending on the document, although formation and organizational documents must be kept indefinitely.