Series 79 practice questionhardDue Diligence Defense
An underwriter is named as a defendant in a lawsuit under Section 11 of the Securities Act due to a material misstatement in the registration statement. Which of the following actions could best establish a due diligence defense for the underwriter?
- AEvidence of reasonable investigation, including diligence and reasonable reliance on experts✓ Correct answer
- BShowing it delegated the investigation to the issuer's legal counsel and reviewed their summary reports.
- CEstablishing that it had previously underwritten another offering for the issuer without incident.
- DProving that it was unaware of the misstatement because it trusted the issuer's management.
Explanation
Why A — Evidence of reasonable investigation, including diligence and reasonable reliance on experts
The due diligence defense requires an underwriter to show it made a reasonable investigation and believed the statements were true. Simply relying on others or past experience is insufficient, making option A correct. The trap is thinking that reliance on counsel or management alone meets the standard, when active investigation is required.
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