Provides Customers with Information About Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Records
Providing Information and Making Recommendations on DPPs
Explaining the product and making the recommendation
A DPP is a flow-through vehicle - usually a limited partnership or an LLC taxed as a partnership - in which investors are limited partners and a general partner manages the enterprise and bears unlimited liability. Programs fall into oil and gas (drilling, income, or combination), real estate (existing properties, new construction, raw land), and equipment leasing. Know for each: the sponsor, minimum investment, offering period, use of proceeds, and the compensation stack.
Compensation is the classic exam target. Investors should see how much of each dollar reaches the program. FINRA Rule 2310 limits organization and offering expenses in public DPP offerings to about 15% of gross proceeds and caps front-end and deferred sales charges; the general partner also typically takes acquisition fees, management fees, and a back-end "promote" share of gains. Selling outside those limits is a red flag, as are conflicts such as the sponsor selling property it owns to the partnership.
Tax features must be explained honestly. Income and losses flow through to investors, who generally cannot deduct losses beyond passive income from other passive investments (the $25,000 rental real estate allowance phases out between $100,000 and $150,000 of AGI). At-risk rules can further limit deductions. Oil and gas programs generate intangible drilling cost deductions and depletion allowances; real estate programs generate depreciation - and "phantom income" when taxable income exceeds cash distributed. REITs are corporations, not DPPs: no flow-through, but required distribution of 90% of taxable income and far greater liquidity.
Trap: A customer whose stated reason for buying is the tax write-off. Tax benefits cannot make an otherwise unsuitable, illiquid investment suitable.
Rule of thumb: At least 85 cents of every dollar invested should go to work in the program.
Transfers of Assets and Maintaining Appropriate Records
Moving assets and keeping the file
Most brokerage assets move through ACATS, but DPP units generally are not DTC-eligible and often cannot be transferred electronically. A limited partnership interest is transferred by assignment: the seller signs transfer documents, signatures are typically medallion-guaranteed, the general partner consents and may require an opinion of counsel (for example, to confirm the transfer will not endanger the partnership's tax status or create a publicly traded partnership), and the issuer's transfer agent re-registers the units. Confirm with the issuer before promising a client a settlement date - a "three-day transfer" representation is wrong for a DPP. On death, units pass to the estate or named beneficiary with a stepped-up basis; the firm needs a death certificate, estate documentation, and an updated tax identification number.
Recordkeeping is where firms get fined. FINRA Rule 4511 and SEA Rule 17a-4 require books and records to be preserved for six years, the first two in an easily accessible place; electronic records must be kept in a non-rewritable, non-erasable format. Retail communications must be retained for three years. Customer account statements go out at least quarterly under FINRA Rule 2231, and confirmations must be delivered at or before settlement under SEA Rule 10b-10 with the required disclosures - price, capacity, compensation, and the fact that the security is not listed on an exchange. Subscription documents, purchaser questionnaires, accredited-investor verifications, and suitability notes belong in the client file.
Trap: Assuming the representative can advise on the tax treatment of a transfer. The representative moves the paperwork; the customer's tax adviser handles the tax.
Rule of thumb: Six years for books and records, three years for advertising, quarterly for statements.