Beyond the Data Room: The Investment Banker’s Duty in Due Diligence

Due Diligence: A Regulatory and Practical Imperative for Investment Bankers

The Role of Investment Bankers in Diligence

Investment bankers play a central role in preparing companies for the inevitable scrutiny that comes with due diligence. Because experienced bankers have navigated the process across numerous transactions, they are uniquely positioned to help management anticipate requests, identify potential weaknesses, and coordinate the flow of information between issuers and prospective investors or buyers.

Although diligence requests are often led by private equity groups, strategics, family offices, or their counsel, many of the core requirements remain consistent across industries, with additional nuances depending on sector-specific risks.

For FINRA-licensed investment bankers, however, due diligence is not only a market expectation — it is a regulatory obligation. A robust diligence process serves both purposes: satisfying investor expectations and meeting regulatory requirements.

Why Diligence Matters

In investment banking, diligence is more than a procedural step; it is the foundation of trust and credibility. Whether in M&A transactions or capital raising, the quality of diligence can determine not only whether a deal closes, but also how a banker and their firm are perceived long afterward.

• Clients expect bankers to probe beyond surface-level financials.
• Regulators demand that representations be tested and verified.
• Counterparties evaluate not just deal outcomes, but the rigor of the process itself.

Insufficient diligence can expose investment bankers to litigation, regulatory actions, and reputational harm. Strong diligence, by contrast, signals professionalism, transparency, and discipline — qualities that differentiate firms in competitive markets.

At its essence, diligence tests whether representations align with reality: validating assets, contracts, and intellectual property; evaluating financial health and customer concentration; assessing scalability; and vetting management’s track record and integrity.

FINRA’s Perspective: Independent and Rigorous Investigation

FINRA has consistently emphasized that broker-dealers and their investment bankers must go beyond issuer-provided information when marketing an opportunity. Two key regulatory notices highlight this expectation:

Regulatory Notice 10-22
Firms must conduct an independent and reasonable investigation into:

• The issuer and its management team
• The issuer’s business prospects and financial condition
• The assets and properties held
• The intended use of offering proceeds (in a capital raise)
• The claims made in offering materials

Regulatory Notice 23-08
Building upon 10-22, this notice integrates Reg BI obligations with FINRA’s suitability framework, highlighting effective practices such as:

• Verification of issuer claims with primary-source documentation
• Thorough review of management’s background, including litigation or regulatory history
• Escalation of red flags through deeper investigation
• Engagement of third-party experts where appropriate
• Documentation of the full investigative process, including sources reviewed, meetings conducted, and conclusions reached

Practical Principles for Bankers

Taken together, FINRA’s guidance and industry practice converge on several guiding principles:

1. Independent Verification – Confirm issuer claims through objective evidence.
2. Tailored Scope – Align diligence depth with the complexity and risk profile of the offering.
3. Red Flag Duty – Pursue inconsistencies until they are reasonably resolved.
4. Supervision & Controls – Maintain firm-wide policies, supervisory procedures, and oversight of offerings.
5. Best Interest & Suitability – Ensure offerings meet the Reg BI standard for retail investors (where applicable) or are otherwise suitable for targeted institutional buyers.
6. Documentation – Preserve a clear, comprehensive record of diligence activities, findings, and supervisory approvals.

While these principles overlap with the regulatory checklists in Notices 10-22 and 23-08, they also reflect best practices observed in real-world transactions. A robust diligence process serves both needs simultaneously.

Conclusion

Diligence is not simply the administrative work of populating a deal room. It is a discipline of skepticism, independence, and thoroughness. Bankers who treat diligence as a regulatory and professional imperative strengthen both their client relationships and their firm’s reputation.

When an investment banker supports a transaction, the sign-off should represent more than financial structuring — it should reflect credibility, trust, and the assurance that claims have been independently tested against reality.