So many broker-dealers that sold private placements have gone out of business instead of settling their obligations that it's hard to remember exactly what they did wrong in the first place.
From Securities America -- sold after months of trying to find a buyer who could absorb its private placement fines -- to all the smaller firms that simply crashed, "due diligence" is cited as the reason their clients lost money.
If these firms had done their due diligence, FINRA says, they would have figured out that these particular securities were poorly constructed and extremely dangerous.
They wouldn't have sold them. Their clients would have never booked those particular losses. And the firms would probably still be around today.
But the firms say they did their homework, so what qualifies as "due diligence" to the regulators today?
The filings around one of the rare survivors, Next Financial, give us a pretty strong road map of what satisfies FINRA now.
The regulators wanted to see every firm dig into the financials to make sure the prospectus tells the truth.
They want at least part of the investigation process to happen at the issuer's headquarters, so investment officers can actually verify that they aren't dealing with a fly-by-night operation.
And they want due diligence on an ongoing basis. Simply checking out the securities before you start selling them is not enough.
Next Financial is "only" paying $2 million to settle its fines and has the cash to move forward.
It's a good bet they'll be following the rules to the letter the next time they think about adding a fairly exotic security to their investment shelf.
Their competitors can learn from that lesson as well.