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In the investment world, Due Diligence refers to the full investigation of a product and transaction, before the transaction takes place. This confirms that all details are correct, and no important information is left out.

Due Diligence can also refer to the investigation a seller does on a buyer. For example, a seller may conduct due diligence on a buyer to make sure the buyer has adequate resources to complete the purchase.

For individual investors, doing Due Diligence on a security is voluntary, but recommended. It ensures the investor is fully informed about the suitability of the investment.

Broker dealers, however, are legally obligated to conduct due diligence on a security before selling it. This prevents them from being held liable for non-disclosure of pertinent information.

The term due diligence came into use with the Securities Act of 1933. The act states that if a Broker Dealer conducts reasonable due diligence on a security, and passes the information on to the buyer before a transaction, the Broker cannot be held liable for non-disclosure of information that was not found during the investigation.

For example, if John Smith wants to buy a security from ABC Brokerage, the brokerage is required to give Smith the results of its Due Diligence on that security. Mr. Smith may also choose to do his own research on the security, transaction details and the brokerage itself, so he understands and is comfortable with all details of the transaction. 

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