Series 63 Uniform Securities Agent State Law Exam

Correct: Under FINRA suitability rules and the specific nature of Direct Participation Programs (DPPs), a representative must ensure that the investor has a net worth sufficient to sustain the risks of the program, including its lack of liquidity. Since the investor has a specific liquidity need in four years (education funding) and their current wealth is already concentrated in illiquid business interests, the representative must evaluate the total portfolio composition. This ensures that the addition of another illiquid asset does not jeopardize the investor’s ability to meet future financial obligations, regardless of their tax-deferred growth objectives. Incorrect: Relying on prior experience with liquid equities is insufficient because DPPs have unique liquidity and valuation risks that liquid markets do not share. Focusing solely on tax-equivalent yield ignores the fundamental suitability requirement to consider the investor’s overall financial situation and liquidity needs. While a CPA’s confirmation may help establish accredited status under Regulation D, it does not satisfy the representative’s ongoing obligation to perform a customer-specific suitability analysis regarding the investor’s actual financial constraints and goals. Takeaway: Suitability for illiquid DPPs requires a holistic review of an investor’s balance sheet to ensure that the lack of marketability does not conflict with their known future liquidity requirements or over-concentrate their net worth in non-liquid assets.

Correct: Under the Uniform Securities Act, the exclusion for certain professionals, such as accountants, is only available if the investment advice provided is solely incidental to the practice of their profession. When a firm charges a separate fee for investment advice and markets it as a standalone service, the advice is no longer considered incidental. Consequently, the firm meets the statutory definition of an investment adviser by providing advice about securities as a business for compensation, which requires registration at either the state or federal level depending on assets under management. Incorrect: The approach suggesting a blanket exclusion for all licensed accountants is incorrect because the exclusion is strictly conditional upon the advice being incidental to their primary accounting duties. The claim that a third-party partner can inherit the institutional exclusion of a credit union is a regulatory misunderstanding; exclusions for banks and savings institutions are entity-specific and do not extend to separate legal entities or joint ventures. Finally, the belief that registration is only required for those with custody or discretion is a common misconception, as the requirement to register is triggered by meeting the definition of an investment adviser, whereas custody and discretion only affect specific financial bonding and reporting requirements. Takeaway: The professional exclusion for accountants from the investment adviser definition is lost if the advice is not incidental to their practice or if they receive separate compensation for it.

Correct: In a Tenants-in-Common (TIC) structure, IRS Revenue Procedure 2002-22 requires that certain major decisions, such as the sale or lease of the property, must be made by unanimous consent of all co-owners. This creates a ‘holdout’ risk where one investor can block the group’s objectives. In contrast, a Delaware Statutory Trust (DST) provides centralized management through a trustee, which prevents individual investors from interfering with the operation or sale of the property, making it a more stable structure for many passive investors. Incorrect: The ability for an investor to personally manage the property is incorrect because both TICs and DSTs are typically structured as passive investments where a professional sponsor or manager handles operations. The idea that replacement property must be in the same state is a common misconception; Section 1031 allows for the exchange of any real property held for productive use in a trade or business or for investment within the United States. The 35-investor limit is a guideline for TIC arrangements under the IRS safe harbor, whereas DSTs can accommodate a significantly larger number of investors, often up to 499 or more. Takeaway: A primary structural advantage of the Delaware Statutory Trust over a Tenants-in-Common arrangement is the elimination of the unanimous consent requirement, which mitigates the risk of individual investors blocking major property decisions.

Correct: Regulation FD (Fair Disclosure) is designed to prevent selective disclosure of material nonpublic information. When an issuer, or a person acting on their behalf, intentionally discloses such information to market professionals or shareholders who may trade on it, the issuer is required to make a simultaneous public disclosure. This is typically achieved by filing a Form 8-K with the SEC or using another method of distribution that provides broad, non-exclusionary access to the public. Incorrect: Obtaining non-disclosure attestations after an intentional selective disclosure does not satisfy the regulatory requirement for public dissemination. Notifying FINRA’s Advertising Department is a separate compliance function related to communication standards, not disclosure of material events. Waiting until a quarterly filing is insufficient because Regulation FD requires immediate (simultaneous for intentional, prompt for unintentional) public disclosure to ensure all investors have equal access to material information. Takeaway: Under Regulation FD, any intentional disclosure of material nonpublic information to market professionals requires simultaneous public disclosure to maintain a level playing field for all investors.

Correct: Under SEC Rule 17a-4(f), if a broker-dealer uses electronic storage media to preserve records, the media must be non-rewriteable and non-erasable. This is commonly referred to as WORM (Write Once Read Many) format. This requirement is designed to ensure the integrity and original state of the records, preventing any tampering, modification, or unauthorized deletion during the mandatory retention period. Incorrect: The suggestion to delete duplicates is incorrect because the rule focuses on the integrity of the storage medium itself, not just the existence of a master copy. Restricting access to principals is a general internal control but does not address the technical WORM requirement of the storage media. While microfiche is an acceptable form of record-keeping under the rule, there is no requirement to transition electronic records into physical microfiche after two years; electronic records can remain electronic as long as they meet the WORM standards. Takeaway: SEC Rule 17a-4 requires that electronic records be maintained in a non-rewriteable, non-erasable (WORM) format to ensure data integrity throughout the retention period.

Correct: Under Regulation Best Interest (Reg BI), broker-dealers and their associated persons must act in the best interest of the retail customer at the time a recommendation is made. Non-cash compensation, such as lavish travel and lodging provided by a DPP sponsor, creates a material conflict of interest. The firm must evaluate if such incentives improperly influence the representative’s recommendation, as Reg BI requires firms to establish, maintain, and enforce written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, such conflicts. Incorrect: Disclosing the value of the trip on a website is insufficient because Reg BI requires more active mitigation or elimination of conflicts that could bias recommendations. Production requirements or quotas to qualify for sponsor-funded trips are generally prohibited as they create direct conflicts of interest. While principal approval of retail communications is a requirement under FINRA Rule 2210, it does not address the core suitability and best interest concerns raised by the acceptance of high-value non-cash compensation. Takeaway: Regulation Best Interest requires firms to prioritize the client’s needs over representative incentives, specifically by identifying and mitigating conflicts arising from sponsor-provided non-cash compensation.

Correct: Rule 134 of the Securities Act of 1933 provides a safe harbor for certain communications made after a registration statement has been filed but before it becomes effective. These communications are not considered a prospectus if they limit their content to specific items such as the issuer’s name, the type of security, and a brief description of the business. To qualify for this safe harbor, the communication must include a specific legend (unless it is a simple tombstone ad) stating that the registration statement is not yet effective and that no offer to buy can be accepted until it is. Incorrect: Including financial projections or tax-equivalent yields is prohibited under Rule 134, as the rule only allows for a brief, non-promotional description of the business. The requirement for a legend regarding the registration status applies regardless of whether the audience is retail or institutional. A Rule 134 communication is specifically defined as ‘not a prospectus,’ whereas a free writing prospectus is a separate category of communication under Rule 433 that has different filing and content requirements. Takeaway: Rule 134 allows for limited informational notices during the cooling-off period, provided they include a disclaimer that the registration is not yet effective and avoid promotional performance data.

Correct: Under FINRA Rule 2210, any written communication distributed to more than 25 retail investors within any 30-calendar-day period is considered a retail communication. Retail communications generally require approval by a registered principal of the member firm before the earlier of first use or filing with FINRA. Furthermore, firms are required to maintain records of all communications with the public for a period of three years from the date of last use. Incorrect: Filing with FINRA 10 days prior to use is generally required for new member firms or for specific products like options or investment companies, but not typically for all DPP retail communications unless they are deemed to have a ranking or comparison. Classifying the brochure as correspondence is incorrect because correspondence is limited to 25 or fewer retail investors; 35 investors triggers the retail communication classification. Providing a link to EDGAR does not waive the requirement for internal principal approval and oversight of marketing materials. Takeaway: Retail communications distributed to more than 25 retail investors require prior principal approval and must be retained for three years to comply with FINRA recordkeeping and supervision rules.

Correct: Development properties are primarily designed for capital appreciation, as the value of the property increases significantly from raw land to a completed and leased building. Once the property is ‘placed in service,’ the cash flow generated is often partially tax-deferred because depreciation expenses can be used to offset the taxable income. This aligns with the client’s goal of growth and long-term tax efficiency, provided they can tolerate the inherent construction and market risks. Incorrect: The strategy involving immediate passive losses to offset active income is incorrect because tax regulations generally restrict passive losses to offsetting passive income only. The claim that new construction is lower risk than stabilized properties is inaccurate, as development involves significant risks related to construction delays, cost overruns, and market absorption. Finally, providing distributions from offering proceeds during the construction phase is typically a return of capital rather than earned income and does not represent the operational success of a development property. Takeaway: Development DPPs prioritize long-term capital growth and future tax-advantaged income over immediate liquidity or current cash flow.

Correct: Under FINRA Rule 2210, ‘retail communication’ is defined as any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. Because this brochure was sent to 35 investors, it meets the definition of retail communication and must be approved by a registered principal of the member firm in writing prior to its first use. Incorrect: The threshold for retail communication is more than 25 retail investors, not 50, making the second option incorrect. Retail communications generally require prior approval rather than post-use approval, which distinguishes them from correspondence or institutional communications. Finally, a member firm cannot delegate its regulatory responsibility for principal approval to a third-party vendor; the firm remains responsible for all communications it distributes or causes to be distributed. Takeaway: Retail communications, which reach more than 25 retail investors in a 30-day period, require written approval by a registered principal prior to their first use.

Correct: Under the Uniform Securities Act and NASAA Model Rules, a Broker-Dealer is required to establish and maintain a supervisory system reasonably designed to achieve compliance with securities laws. This includes the oversight of all business-related communications. When a gap is identified in the monitoring of non-traditional or encrypted channels, the firm must mandate the use of approved, archivable platforms and implement proactive forensic reviews. This approach aligns with the regulatory expectation that firms must not only have policies in place but must also actively verify that agents are not engaging in unapproved outside business activities or private securities transactions (selling away) through unmonitored channels. Incorrect: Increasing the frequency of keyword scans on firm-issued email and relying on annual attestations is insufficient because it fails to address the specific risk identified: the use of external, unmonitored messaging apps. Attestations are a component of compliance but do not constitute active supervision. Prohibiting all outside business activities is an overreach that does not address the communication monitoring failure and ignores the regulatory allowance for such activities when properly disclosed and supervised. Relying on monthly physical inspections of home offices is an outdated and ineffective method for capturing digital communication gaps and does not provide the continuous oversight required for a fintech environment. Takeaway: Broker-Dealers must implement supervisory procedures that actively monitor and archive all business-related communications across all platforms to fulfill their regulatory obligation to prevent unauthorized agent activities.

Correct: According to FINRA Rule 2210, any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period is defined as a ‘retail communication.’ Retail communications generally require approval by a registered principal of the member firm before the earlier of its first use or filing with FINRA’s Advertising Regulation Department. Incorrect: Correspondence is defined as communication sent to 25 or fewer retail investors within a 30-day period; since 45 investors were contacted, this classification is incorrect. Institutional communication only applies if the recipients are exclusively institutional investors (e.g., banks, insurance companies, or entities with at least $50 million in assets), which does not apply to individual retail investors. A public appearance refers to participation in a seminar, forum, or radio/TV interview, not the distribution of standardized brochures. Takeaway: Any written communication distributed to more than 25 retail investors within a 30-day window is a retail communication and requires prior approval by a registered principal.

Correct: Under FINRA Rule 2210 and general disclosure standards for Direct Participation Programs, communications must be fair, balanced, and not misleading. If a program pays distributions from sources other than cash flow from operations (such as offering proceeds or debt), this fact must be disclosed. Failing to do so creates a misleading impression of the program’s success and the sustainability of the distribution rate. The best next step is to correct the communication to ensure investors are fully informed of the source of their payments. Incorrect: Maintaining internal records does not satisfy the requirement for public communications to be accurate and balanced. Reclassifying the document as institutional does not permit the omission of material facts or the use of misleading statements, as anti-fraud provisions apply to all communications. While filing with FINRA is a procedural step for certain communications, it does not absolve the firm of its immediate responsibility to ensure the content is not misleading before it is used. Takeaway: Communications regarding DPP distributions must clearly identify if the funds are derived from non-operational sources to prevent misleading investors about the program’s financial health.

Correct: Under FINRA Rule 2268, any predispute arbitration agreement must contain specific disclosures that are highlighted and a statement immediately preceding the signature line that the agreement contains a predispute arbitration clause. Furthermore, the member firm is required to provide the customer with a copy of the agreement containing the clause within 30 days of signing. Incorrect: The requirement to file documents with FINRA’s Advertising Regulation Department applies to retail communications under Rule 2210, not account agreements. Notarized attestations for waiving punitive damages are not a requirement of Rule 2268 and may actually conflict with the rule’s prohibition on limiting the ability of arbitrators to make awards. While the rule requires the disclosure to be prominent or highlighted, it does not specify a ‘two points larger’ font size, and it expressly prohibits clauses that limit a customer’s right to participate in class actions. Takeaway: FINRA Rule 2268 requires prominent disclosure of arbitration clauses near the signature line and mandates that customers receive a copy of the signed agreement within 30 days.

Correct: Under FINRA and SEC guidelines, a broker-dealer acting as a dealer-manager for a Direct Participation Program (DPP) has a duty to conduct a ‘reasonable investigation’ (due diligence). This involves verifying material facts and not simply accepting the issuer’s representations at face value, especially when discrepancies or ‘red flags’ are identified. The firm must ensure that the Private Placement Memorandum (PPM) or prospectus accurately reflects the risks and financial condition of the sponsor. Incorrect: Relying on a pre-existing relationship is insufficient because each offering requires its own independent due diligence to verify current material facts. FINRA’s Corporate Financing Department reviews the fairness of underwriting compensation and terms, but this review does not constitute a verification of the issuer’s financial claims or a substitute for the firm’s due diligence. Comfort letters from auditors typically only cover specific financial data and do not relieve the dealer-manager of its broader responsibility to investigate non-financial material statements and general risk factors. Takeaway: Dealer-managers must perform an independent, reasonable investigation of an issuer’s material claims to fulfill their due diligence obligations and protect investors from misleading disclosures.

Correct: In a Direct Participation Program (DPP), staged payments (or installment payments) are mandatory, legally binding obligations that the investor agrees to at the time of subscription. Mischaracterizing these as ‘voluntary’ or ‘flexible’ assessments is a significant compliance failure because it misleads the investor about their total capital commitment and the potential legal and financial consequences (such as forfeiture of interest) if they fail to make the subsequent payments. Incorrect: Staged payments do not require a 1:1 match from the general partner, although the GP’s skin in the game is a due diligence item. While staged payments involve an extension of credit, they are regulated under SEC Rule 15c2-5 and FINRA Rule 2310 rather than requiring the broker-dealer to register as a commercial lender under the Truth in Lending Act. Voluntary assessments are not prohibited; they are a common feature in many DPPs, such as oil and gas programs, but they must be accurately distinguished from mandatory installments. Takeaway: Mandatory staged payments in a DPP are firm financial commitments that must be clearly distinguished from voluntary assessments in all sales communications to ensure investors understand their total liability.

Correct: Under FINRA Rule 2210, all retail communications must be approved by a registered principal of the firm before use. Furthermore, for Direct Participation Programs (DPPs), the representative and the firm have a duty to ensure the investment is suitable for the client. Processing a transaction with missing suitability signatures or using unapproved marketing materials violates both internal compliance controls and FINRA’s conduct rules. The transaction must be paused to rectify these deficiencies to ensure the investor is protected and the firm remains in compliance. Incorrect: Processing the subscription without a signature to meet a deadline is a violation of suitability and recordkeeping requirements. Seeking a waiver for a suitability signature is not a permissible regulatory practice as the firm must independently verify suitability before the sale. Filing a corrective disclosure with FINRA does not absolve the firm of the requirement to have principal approval for communications or to have fully executed subscription documents before confirming a transaction. Takeaway: All DPP transactions must be supported by principal-approved communications and fully executed suitability documentation to ensure regulatory compliance and investor protection.

Correct: Under Section 15(a) of the Securities Exchange Act of 1934, individuals or entities that engage in the business of effecting transactions in securities for the account of others must be registered as broker-dealers. The SEC consistently views the receipt of transaction-based compensation (commissions or success fees) as a key factor indicating that a person is ‘engaged in the business’ of brokering securities, regardless of whether they participate in negotiations. Incorrect: The ‘finder’ exception is extremely narrow and generally does not apply if transaction-based compensation is involved. Limiting solicitation to accredited investors does not waive the broker-dealer registration requirement for the person performing the solicitation. The issuer’s exemption (Rule 3a4-1) specifically prohibits the payment of commissions or transaction-based compensation to the associated persons relying on the safe harbor. Takeaway: Receipt of transaction-based compensation for soliciting securities investments generally triggers the requirement for broker-dealer registration under the Securities Exchange Act of 1934.

Correct: FINRA Rule 5110(g)(4) explicitly prohibits certain underwriting arrangements, including any allowance to pay for a member’s overhead, salaries, supplies, or similar expenses incurred in the normal course of business. Additionally, the rule requires that any expense reimbursement be for actual, itemized out-of-pocket expenses, making a non-itemized or overhead-based allowance a violation of the rule’s fairness standards. Incorrect: Option b is incorrect because while 15% is the limit for total organization and offering (O&O) expenses in a DPP, the specific prohibition on overhead reimbursement under Rule 5110 still applies regardless of the total percentage. Option c is incorrect because non-accountable expense allowances are strictly limited to 1% of the offering proceeds under Rule 5110. Option d is incorrect because capital expenditures like hardware and general overhead are not considered bona fide due diligence expenses and cannot be reimbursed as such; they are considered part of the member’s cost of doing business. Takeaway: Under FINRA Rule 5110, underwriters are prohibited from receiving reimbursements for general overhead, salaries, or other normal business expenses as part of the underwriting arrangement.

Correct: While a General Partner (GP) has the exclusive right to manage the partnership’s day-to-day operations, this power is constrained by a fiduciary duty to act in the best interest of the limited partners. Engaging in self-dealing or awarding contracts to affiliates at above-market rates without a transparent, competitive process is a breach of the duty of loyalty, as it prioritizes the GP’s personal or family interests over the financial health of the partnership. Incorrect: The GP’s management authority is not absolute and does not supersede fiduciary obligations. Disclosure after the fact does not automatically cure a breach of loyalty if the transaction was not conducted on an arm’s-length basis. Furthermore, the GP does not have the unilateral right to define ‘fair market value’ in a way that justifies overpaying an affiliate, as this would undermine the protective nature of the fiduciary relationship. Takeaway: A General Partner’s exclusive management authority is always subject to their fiduciary duty to act in the best interest of the limited partners and avoid undisclosed or unfair self-dealing.

Correct: Under SEC Rule 17a-14, broker-dealers are required to deliver Form CRS to existing retail customers before or at the time of recommending a new investment product or service that is materially different from what was previously provided. Recommending a Direct Participation Program (DPP) to a client who has not previously held such assets constitutes a new product recommendation, triggering the delivery requirement to ensure the client understands the nature of the relationship, fees, and conflicts of interest associated with the new investment type. Incorrect: The requirement to deliver Form CRS is not limited to the initial account opening; it is also triggered by recommendations of new products or services to existing clients. Delivering the form 30 days after a subscription agreement is signed is non-compliant, as the rule requires delivery at or before the time of the recommendation. Furthermore, the definition of a ‘retail investor’ for Form CRS purposes includes all natural persons seeking services for personal, family, or household purposes, regardless of their status as accredited investors under Regulation D. Takeaway: Broker-dealers must deliver Form CRS to existing retail customers whenever a new investment product or service is recommended, regardless of the length of the existing relationship.

Correct: Regulation S-P requires broker-dealers and investment companies to provide customers with a ‘reasonable means’ to opt out of sharing nonpublic personal information with nonaffiliated third parties. Providing a toll-free number or a simple check-off box on a form are specifically cited as reasonable methods. The notice must be provided before the information is shared. Incorrect: Requiring a customer to write their own letter is explicitly considered an unreasonable barrier to opting out under Regulation S-P. Delaying the initial notice is a violation because it must be provided at the time the customer relationship is established. The requirement to provide an opt-out notice applies to sharing with nonaffiliated third parties generally, regardless of whether the third party intends to resell the data, unless a specific exception (like joint marketing or service processing) applies. Takeaway: Under Regulation S-P, firms must provide a simple and accessible method, such as a toll-free number, for customers to opt out of data sharing with nonaffiliated third parties.

Correct: Under FINRA Rule 2210, any written communication distributed to more than 25 retail investors within a 30-calendar-day period is considered a retail communication. Retail communications must be approved by a registered principal before the earlier of its use or filing with FINRA. Additionally, communications must be fair and balanced; highlighting potential yields without adjacent risk disclosures is a violation. The firm must stop the use of the non-compliant material, perform the required principal review, and ensure proper recordkeeping of the communication as required by SEC and FINRA rules. Incorrect: Filing with FINRA is not a substitute for internal principal approval, and Regulation D offerings generally do not require filing of sales literature with FINRA unless the firm is in its first year of operation. Reclassifying the material as correspondence is incorrect because the threshold for retail communication is more than 25 retail investors, not 50. Sending a separate risk disclosure does not correct the initial failure to provide a balanced communication in the primary marketing piece, nor does it address the lack of prior principal approval and recordkeeping failures. Takeaway: Retail communications regarding DPPs must be approved by a principal prior to use and must provide a fair and balanced presentation of risks and benefits to satisfy FINRA Rule 2210.

Correct: Rule 425 of the Securities Act of 1933 requires that all written communications relating to a business combination transaction, made in reliance on Rule 165, must be filed with the SEC on or before the date of first use. This ensures that the regulator and the public have access to the same information being provided to investors during the pre-filing and waiting periods of a registration. Incorrect: The requirement to file under Rule 425 is not limited to financial projections; it encompasses all written communications related to the transaction. The 10-business-day window is a common timeframe for certain FINRA retail communication filings under Rule 2210, but it does not satisfy the ‘date of first use’ requirement of Rule 425. Communications to existing security holders are specifically included in the filing requirements for business combinations to prevent selective disclosure or misleading solicitations during mergers. Takeaway: Written communications regarding business combinations must be filed with the SEC on the date of first use to maintain transparency and regulatory compliance.

Correct: Under FINRA Rule 2210, all retail communications must be fair, balanced, and provide a sound basis for evaluating the facts regarding any security or service. When a communication highlights the potential benefits of a Direct Participation Program (DPP), such as tax advantages or high yields, it must also provide a balanced discussion of the corresponding risks, including the potential for total loss of investment and the lack of a secondary market for the interests. Incorrect: Providing risk disclosures only upon request or referring solely to the PPM is insufficient because the retail communication itself must be balanced at the time of delivery. Labeling a document as institutional only does not permit misleading or unbalanced content if the firm knows or has reason to know it will be seen by retail investors. Certifications of projected returns are often prohibited or highly restricted as they can be seen as promissory or misleading in a speculative investment context. Takeaway: FINRA Rule 2210 requires that any retail communication highlighting the benefits of a DPP must be balanced with a prominent discussion of its specific risks and illiquidity.

Correct: Under FINRA Rule 2210 and general due diligence requirements for Direct Participation Programs, a broker-dealer cannot simply rely on the issuer’s claims. They must perform an independent investigation to verify material facts. Furthermore, all communications with the public must be fair and balanced; highlighting benefits like tax advantages while obscuring risks like capital calls or management control violates the requirement for a balanced presentation of the investment’s profile. Incorrect: Relying solely on issuer representations or indemnification agreements is insufficient because the broker-dealer has an independent duty to conduct due diligence. Prioritizing tax advantages over risk factors creates an unbalanced communication that misleads investors. Finally, providing a prospectus does not cure deficiencies or misleading statements found in supplemental marketing materials; the marketing materials themselves must be fair and balanced. Takeaway: Broker-dealers must independently verify joint venture offering details and ensure that all promotional materials provide a balanced view of both potential benefits and structural risks.

Correct: Under FINRA due diligence standards for Direct Participation Programs and private placements, a dealer-manager has a duty to conduct a ‘reasonable investigation’ into the issuer and the offering. This includes verifying that the ‘use of proceeds’ section in the offering documents is accurate and complete. Relying blindly on an issuer’s representations, especially regarding significant allocations like ‘general corporate purposes’ or ‘working capital,’ is insufficient if there are red flags or undisclosed liabilities that the funds might be used to cover. Incorrect: Relying on a management representation letter is a common practice but does not fulfill the requirement for independent due diligence when verifying material facts. Focusing only on the 15% expense cap addresses the quantity of fees but fails to address the qualitative accuracy of how the remaining proceeds are used. Implementing a post-offering audit is a reactive measure that does not satisfy the pre-offering due diligence requirement to ensure the PPM is accurate at the time of solicitation. Takeaway: Dealer-managers must perform independent due diligence to verify that the use of proceeds disclosed in a DPP offering document accurately reflects the issuer’s actual intended spending.

Correct: SEC Rule 10b-10 mandates that broker-dealers provide customers with a written confirmation at or before the completion of a transaction. This confirmation must disclose specific details, including whether the broker-dealer acted as an agent or a principal, and the amount of any markup or markdown in certain principal transactions. For Direct Participation Programs and similar illiquid assets, these disclosures are critical for transparency regarding the costs and nature of the trade. Incorrect: Providing disclosures only in quarterly statements is insufficient as Rule 10b-10 requires confirmation at or before the completion of the transaction. Filing a SAR is an AML requirement that does not address the specific disclosure obligations of Rule 10b-10. Verbal disclosure is not a substitute for the mandatory written confirmation required by the rule, which serves as a formal record of the transaction terms. Takeaway: SEC Rule 10b-10 requires timely, written disclosure of a broker-dealer’s capacity and compensation for every securities transaction to ensure investor protection.

Correct: Suitability rules require a reasonable basis to believe a recommendation is appropriate for the customer based on their investment profile, which includes their other security holdings and financial situation. When a portfolio is already heavily weighted in illiquid assets, adding more illiquidity requires specific justification to ensure the client can meet short-term cash needs and is not over-exposed to a single asset class or risk factor. Documenting this analysis is critical for compliance with suitability obligations. Incorrect: Relying solely on accredited investor status is incorrect because being an accredited investor does not exempt a representative from the obligation to ensure a recommendation is suitable for the client’s specific needs. Generic disclosures do not replace the requirement for a personalized suitability determination. While high concentration is a significant risk factor, FINRA rules do not establish a fixed percentage cap that triggers an automatic rejection; instead, they require a nuanced analysis of the client’s total financial picture and objectives. Takeaway: Registered representatives must evaluate a client’s existing portfolio composition and liquidity needs before recommending additional illiquid investments to ensure overall diversification and suitability.