Series 9 and 10 General Securities Sales Supervisor Exam

Correct: The Dealer Manager in a Direct Participation Program (DPP) offering is responsible for coordinating the distribution and ensuring that the subscription process follows regulatory standards. This includes performing due diligence and maintaining books and records. In a contingent offering (like an all-or-none or mini-max), the Dealer Manager must ensure that investor funds are sent to an independent escrow agent and that subscription agreements are reviewed for completeness and suitability before being processed by the sponsor. Incorrect: Holding checks locally is a violation of prompt transmittal rules and escrow requirements for contingent offerings. Bypassing the Dealer Manager for document submission ignores the Dealer Manager’s specific regulatory role in maintaining books and records and overseeing the selling group. Relying solely on the sponsor for suitability verification is inappropriate as the broker-dealers involved in the distribution have an independent obligation to ensure the investment is suitable for their clients. Takeaway: The Dealer Manager must maintain active oversight of the subscription process, ensuring that suitability is verified and that funds are handled through appropriate escrow channels in contingent offerings.

Correct: Rule 100 of Regulation FD (Selective Disclosure) requires that when an issuer, or person acting on its behalf, unintentionally discloses material non-public information to certain persons (including broker-dealers and investors), the issuer must make public disclosure of that information promptly. ‘Promptly’ is defined as the later of 24 hours or the commencement of the next day’s trading on the New York Stock Exchange. Filing a Form 8-K is a standard method for achieving this broad public dissemination. Incorrect: Requiring a retroactive confidentiality agreement does not satisfy the regulatory requirement for public disclosure once the information has been selectively shared with market professionals. Updating the private placement memorandum for a limited group still constitutes selective disclosure and fails the requirement for broad public access. Waiting for a scheduled press release is insufficient because the rule requires ‘prompt’ disclosure once the unintentional leak is discovered, typically within 24 hours. Takeaway: Regulation FD requires that unintentional selective disclosures of material information be remedied by prompt public dissemination to ensure a level playing field for all investors.

Correct: Under FINRA Rule 1210, each person engaged in the investment banking or securities business of a member must be registered in the category of registration appropriate to his or her functions. This includes those who are involved in the management of the member’s securities business, such as supervising the solicitation of other broker-dealers in a dealer-manager capacity for a DPP. Function, rather than job title or compensation structure, dictates the registration requirement. Incorrect: The claim that registration is only required for those receiving commissions is incorrect because registration is based on the function performed, not the method of compensation. Classifying individuals as Foreign Associates is not a valid exemption for domestic employees performing dealer-manager functions. There is no 120-day grace period for performing principal functions without the appropriate registration; while there are provisions for temporary assignments in specific vacancy scenarios, they do not apply to the standard conduct of business described. Takeaway: Registration requirements under FINRA Rule 1210 are strictly determined by the functional role an individual performs in the securities business, particularly regarding management and solicitation activities.

Correct: Under Section 5 of the Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA), a person who violates the Act by purchasing or selling a security while in possession of material, non-public information shall be liable in a private right of action to any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased or sold securities of the same class. The total amount of damages imposed is limited to the profit gained or loss avoided in the transactions that are the subject of the violation, and the amount of damages must be diminished by any amounts the violator is required to disgorge to the SEC. Incorrect: Treble damages (up to three times the profit gained or loss avoided) are a civil penalty that the SEC may seek, but they are not the measure of damages in a private action brought by contemporaneous traders. Liability for insider trading applies to any person in possession of material non-public information, regardless of whether they hold a specific role like a registered principal or dealer manager. The statute of limitations for such private actions is five years from the date of the last transaction that is the subject of the violation, not two years from an SEC investigation. Takeaway: Contemporaneous traders have a private right of action against insider traders, with damages capped at the violator’s profit gained or loss avoided, less any SEC disgorgement.

Correct: Under Rule 8320, if a member or person associated with a member fails to pay any fine, other monetary sanction, or cost within 15 days after it becomes due, FINRA may, after seven days’ notice in writing, suspend or expel the member or revoke the registration of the person. For a firm acting as a dealer manager in a DPP offering, maintaining active registration is vital to continue operations and fulfill its role in the syndication. Incorrect: Reclassifying a fine as a syndication expense is prohibited as fines are the responsibility of the sanctioned party and cannot be passed to the issuer or investors. Filing with the SEC for a stay is not the standard procedure for payment of FINRA fines and does not stop the 15-day clock under Rule 8320. Deducting fines from the underwriting compensation pool would likely violate the terms of the dealer manager agreement and FINRA Rule 2310 regarding fair and reasonable compensation. Takeaway: Failure to pay FINRA-imposed sanctions within 15 days of the due date can lead to the suspension or revocation of a member firm’s registration, jeopardizing its ability to manage DPP offerings.

Correct: In a managed offering, the Dealer Manager is specifically responsible for performing due diligence on the program and the issuer. Additionally, they are required to maintain the books and records associated with the offering, which includes the solicitation and allocation of retail participation by other broker-dealers in the selling group. Incorrect: Providing a firm commitment is a specific type of underwriting where the broker-dealer risks its own capital, which is not a standard requirement for a Dealer Manager in a DPP. Executing subscription agreements is the responsibility of the individual investors and the general partner/sponsor, not the Dealer Manager. Direct payment from the sponsor to soliciting dealers is a characteristic of a sponsor-managed offering, whereas in a managed offering, the Dealer Manager typically coordinates these financial relationships. Takeaway: The Dealer Manager in a managed DPP offering serves as the central entity for due diligence, selling group coordination, and the maintenance of distribution records.

Correct: Direct Participation Programs are inherently illiquid investments. Because there is no active secondary market, investors must be prepared to hold their interests for the life of the program. Regulatory standards emphasize that any potential resale is often restricted by the program’s partnership agreement and, if a sale is possible, it typically occurs at a significant discount to the offering price or the current net asset value. Incorrect: Dealer managers are responsible for the distribution and due diligence of the offering but have no regulatory obligation to provide liquidity or find buyers for existing investors. Best Efforts underwriting refers to the method of selling the initial offering and does not create a buy-back obligation for the issuer. Resale limitations are a fundamental characteristic of the DPP structure itself and are not dependent on the type of underwriting commitment, such as Mini-Max or All-or-None. Takeaway: Direct Participation Programs are long-term, illiquid investments with no guaranteed secondary market, requiring clear disclosure of resale limitations to investors.

Correct: In a managed offering, the Dealer Manager is specifically tasked with performing due diligence on the program, soliciting and allocating retail participation among other broker-dealers, and maintaining the necessary books and records. These responsibilities are central to the Dealer Manager’s role as the intermediary between the sponsor and the selling group. Incorrect: Providing a financial guarantee is typical of a firm commitment underwriting, which is distinct from the standard dealer manager functions in a best efforts DPP. Assuming the role of a general partner would involve managing the partnership’s business rather than the offering itself and would likely create a conflict of interest. Filing individual tax returns for investors is a personal tax matter for the limited partners and is not a function of the broker-dealer acting as Dealer Manager. Takeaway: The Dealer Manager in a Direct Participation Program is responsible for due diligence, record-keeping, and coordinating the distribution of the offering.

Correct: Under FINRA Rule 2214, member firms that use investment analysis tools must provide FINRA with access to the tool and any templates used to generate reports within 10 business days of a request. This ensures that the regulator can verify the integrity of the simulations and the adequacy of the required disclosures, such as the hypothetical nature of the results and the fact that they do not guarantee future performance. Incorrect: Providing only a written summary or sample reports is insufficient because the rule specifically mandates access to the tool itself. There is no requirement for a 24-hour merit review filing specifically triggered by an information request; rather, the rule focuses on post-use access and disclosure standards. Furthermore, Rule 2214 does not prohibit the use of these tools for retail investors; it establishes the conditions and disclosures under which they may be used for such audiences. Takeaway: Firms using investment analysis tools must be prepared to grant FINRA access to the actual software and methodology within 10 business days of a formal request to ensure regulatory oversight of hypothetical projections.

Correct: In a managed Direct Participation Program (DPP) offering, the Dealer Manager is the central entity responsible for performing due diligence on the issuer and the program. According to FINRA rules and standard syndication practices, the Dealer Manager must also maintain the books and records of the offering, which includes documenting the investigation into the issuer’s claims to ensure there is a reasonable basis for the offering’s suitability. Incorrect: Option B is incorrect because due diligence and record-keeping are core regulatory functions of the Dealer Manager, not optional tasks. Option C is incorrect because indeterminate compensation, such as trailing commissions, is permitted in DPPs as long as it adheres to specific percentage caps and disclosure requirements. Option D is incorrect because the Dealer Manager typically enters into a dealer/manager agreement with the program sponsor, and then subsequently enters into agreements with soliciting dealers or selling group members. Takeaway: The Dealer Manager in a managed DPP offering is legally responsible for conducting due diligence and maintaining the primary books and records of the syndication.

Correct: Under FINRA rules and standards for Direct Participation Programs, a Dealer Manager must exercise reasonable care to ensure that all material facts are adequately and accurately disclosed in the offering documents. This duty requires an independent investigation of the sponsor’s representations, especially when red flags—such as a sanctions screening alert or lack of transparency regarding beneficial ownership—are identified. Relying solely on the issuer’s or sponsor’s assertions does not satisfy the ‘reasonable grounds’ requirement for due diligence. Incorrect: Accepting a sponsor’s written attestation is insufficient because the Dealer Manager has an independent obligation to verify material facts. Focusing exclusively on financial statements ignores the qualitative and regulatory risks associated with the provider’s background that must be disclosed. Relying on a wholesaler’s summary is also inadequate, as the Dealer Manager cannot delegate its primary responsibility for ensuring the integrity of the due diligence process to a third party without performing its own verification. Takeaway: Reasonable care in DPP offerings necessitates an independent verification of material facts and sponsor representations to ensure the accuracy and completeness of disclosures.

Correct: Under Rule 507 of Regulation D, an exemption under Rule 504, 505, or 506 is not available to an issuer if that issuer, or any of its predecessors or affiliates, has been subject to a court order or injunction for failure to comply with Rule 503 (filing Form D). However, Rule 507(b) allows the SEC to waive this disqualification if the Commission determines, upon a showing of good cause, that the denial of the exemption is not necessary under the circumstances. Incorrect: Option B is incorrect because Rule 507 does not provide for automatic waivers based on management changes or the dissolution of predecessors; a formal determination by the SEC is required. Option C is incorrect because the nature of the investors (accredited) or the size of the offering does not override the disqualification triggered by a Rule 503-related injunction. Option D is incorrect because Rule 507 explicitly applies to exemptions under Rules 504, 505, and 506, not just Rule 506. Takeaway: Rule 507 disqualifies issuers from using Regulation D exemptions if they or their predecessors have been enjoined for failing to file Form D, unless the SEC grants a waiver for good cause.

Correct: Under FINRA Rule 13200, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated person and is between or among members, members and associated persons, or associated persons. Since both the Dealer Manager and the soliciting dealer are member firms and the dispute involves business activities related to a DPP offering, arbitration is mandatory. Incorrect: The assertion that contractual interpretations are exempt is incorrect because Rule 13200 covers all disputes arising from business activities between members, regardless of whether they are based on contract law or securities statutes. The idea that a member has a choice between court and arbitration is false; members waive the right to sue each other in court upon joining FINRA for matters covered by the Code. The involvement of the program sponsor is not a prerequisite for mandatory arbitration between two member firms. Takeaway: FINRA Rule 13200 mandates that business disputes between member firms, such as those involving DPP syndication and commissions, must be resolved through arbitration rather than litigation.

Correct: Under FINRA Rule 9610, a member firm seeking an exemption from a specific rule must file a written application with the appropriate FINRA department. This application must be comprehensive, providing a detailed statement of the grounds for the exemption and clearly defining the specific relief the firm is seeking. This process allows firms to proactively address compliance issues or unique circumstances that may warrant a departure from standard regulatory requirements. Incorrect: Filing with the SEC Division of Enforcement is incorrect because Rule 9610 is a FINRA-specific process for seeking exemptions from FINRA’s own rules. Waiting for a formal deficiency notice is incorrect because the application for exemptive relief is a proactive filing initiated by the member firm, not a response to a disciplinary action. Obtaining investor consent is not a requirement for a Rule 9610 application, as the rule focuses on the regulatory relationship between the member firm and FINRA regarding rule compliance. Takeaway: Rule 9610 requires member firms to file a detailed written application with the appropriate FINRA department when seeking an exemption from specific regulatory requirements.

Correct: According to FINRA Rule 9221, which falls under the 9220 series, a respondent must file a written request for a hearing within 28 days after service of the complaint. This is the critical first step to preserve the firm’s right to a hearing and to avoid a default judgment, where the allegations in the complaint would be deemed admitted. Incorrect: Submitting a petition to the Board of Governors for a 90-day stay is not the standard procedure under Rule 9220, as extensions (Rule 9222) require a motion showing good cause to the Hearing Officer, not the Board. Suspending the offering is a business or regulatory decision but does not address the procedural requirements of the 9220 series. Requesting an informal oral argument does not satisfy the requirement for a written hearing request and does not stop the 28-day clock. Takeaway: To preserve the right to a hearing in a FINRA disciplinary matter, a respondent must file a written request within 28 days of service of the complaint.

Correct: Under SEC Rule 15c2-4, in a contingent offering such as a ‘mini-max’ or ‘all-or-none’ DPP, a broker-dealer must promptly transmit investor funds to an independent escrow agent. ‘Promptly’ is generally defined as by noon of the next business day following receipt. Holding checks for four days to batch them is a regulatory violation, and the principal must ensure the firm corrects the transmission timing to meet the promptness standard. Incorrect: Depositing funds into a firm’s segregated account or operating account is prohibited as it constitutes commingling and fails to meet the requirement of using an independent escrow agent for contingent offerings. Sending checks to the sponsor instead of the escrow agent also violates the rule, as the escrow agent is responsible for holding funds until the contingency is met. Holding checks for batching purposes is not a valid excuse for delaying the required prompt transmission. Takeaway: In contingent DPP offerings, broker-dealers must promptly transmit investor funds to an independent escrow agent, typically by noon of the next business day, to comply with SEC Rule 15c2-4 and protect investor interests until the offering conditions are met or failed.

Correct: Rule 10b-3 prohibits broker-dealers from using any manipulative or deceptive device in connection with the sale of securities. In a contingent offering, such as an ‘all-or-none’ or ‘mini-max’ DPP, it is considered a deceptive practice to satisfy the minimum sales requirement through non-bona fide transactions. Arranging undisclosed loans to purchasers creates a false impression of market demand and investment risk, misleading genuine investors into believing the contingency was met through independent, arms-length transactions. Incorrect: Utilizing wholesalers is a standard and legal syndication practice used to interface between the issuer and the sales force. Extending an offering period via a post-effective amendment is a legitimate regulatory process, provided it includes full disclosure and the right for existing subscribers to receive a refund. Direct payment from a sponsor to dealers is a recognized structure in sponsor-managed offerings and does not constitute a deceptive device under Rule 10b-3. Takeaway: Rule 10b-3 prohibits deceptive arrangements, such as non-disclosed financed purchases, intended to artificially satisfy the minimum requirements of a contingent offering.

Correct: In a managed DPP offering, the dealer manager is responsible for several key functions, including performing due diligence on the program, maintaining books and records, and entering into a formal dealer manager agreement with the program sponsor. They also coordinate the participation of other broker-dealers and may utilize wholesalers to interface between the issuer and the sales force. Incorrect: A firm commitment is an underwriting type where the underwriter buys the entire offering, which is less common in DPPs compared to best-efforts arrangements. Dealer managers do not typically pay sales representatives of other firms directly; compensation flows through the broker-dealer or sponsor agreements. The roles of transfer agent and registrar are distinct administrative functions usually handled by specialized entities, not the dealer manager. Takeaway: The dealer manager in a DPP offering serves as the central coordinator for due diligence and syndication, bridging the gap between the sponsor and the selling group members or wholesalers.

Correct: FINRA Rule 8311 explicitly prohibits a member firm from paying any salary, commission, profit, or other remuneration to a person who has been suspended or barred, if that remuneration would have been earned during the period of the sanction. Furthermore, a suspended person is prohibited from being associated with a member in any capacity, including clerical or ministerial functions, regardless of whether the work is performed on-site or remotely. Incorrect: The other options are incorrect because Rule 8311 does not allow for ‘administrative’ or ‘back-office’ exceptions for suspended individuals; they cannot be associated with the firm in any capacity. Paying commissions for transactions closing during the suspension is prohibited if the earnings are attributed to that period. Allowing the individual to work for a sponsor as a contractor while suspended from the member firm often constitutes a prohibited association if the member firm is involved in the program’s distribution. Takeaway: Rule 8311 mandates a total severance of the professional relationship and compensation during a suspension, prohibiting any form of association or remuneration for the duration of the sanction.

Correct: In a managed offering of a Direct Participation Program (DPP), the Dealer Manager often serves as an affiliate of the sponsor. Under FINRA rules and the functions of a Dealer Manager, it is critical that this relationship is transparently disclosed in the dealer/manager agreement and the offering materials. The Dealer Manager is responsible for maintaining books and records and ensuring that the syndication practices, including the roles of soliciting dealers, are conducted with full disclosure of any conflicts of interest to ensure the integrity of the offering. Incorrect: Option B is incorrect because the Dealer Manager is specifically tasked with performing due diligence and cannot simply delegate this core function to soliciting dealers to avoid conflict. Option C is incorrect because changing the underwriting commitment from best-efforts to firm commitment is a fundamental change to the offering structure and does not address the disclosure requirements of an affiliate relationship. Option D is incorrect because withholding disclosure documents from registered representatives who are soliciting the public violates the requirement for full and fair disclosure to investors. Takeaway: Dealer Managers in DPP offerings must ensure that affiliate relationships with sponsors are clearly disclosed in all agreements and offering documents to manage inherent conflicts of interest.

Correct: According to FINRA Rule 14410, mediation is a voluntary process. Any party may withdraw from mediation at any time prior to the execution of a written settlement agreement by giving written notice to the mediator and all other parties. This underscores the non-binding and consensual nature of the mediation forum compared to the mandatory nature of arbitration for member firms. Incorrect: The suggestion that withdrawal requires the consent of the Director of Mediation or the opposing party is incorrect because mediation is entirely voluntary and does not require permission to terminate. The exchange of confidential materials or position papers does not waive a party’s right to exit the process at any time before a final settlement is signed. Furthermore, a party does not need to prove ‘bad faith’ or provide any specific justification to withdraw from the mediation proceedings. Takeaway: Mediation under the FINRA Rule 14000 Series is a voluntary process that allows any party to withdraw at any time before a settlement agreement is executed.

Correct: Under FINRA Rule 3230 and the Telephone Consumer Protection Act (TCPA), the established business relationship (EBR) exception to the National Do-Not-Call Registry is strictly defined by the nature of the interaction. For a person who has made an inquiry or submitted an application, such as attending a seminar, the EBR exception lasts for only three months from the date of the inquiry. The 18-month EBR exception is reserved exclusively for instances where a financial transaction, purchase, or lease has been completed. Since 14 months have passed since the seminar without a transaction, the representative is violating telemarketing regulations. Furthermore, firms are required to maintain an internal do-not-call list that captures specific consumer requests to not be contacted, which must be honored indefinitely and checked against all outgoing promotional calls. Incorrect: The approach of allowing the representative to continue contacting leads for 18 months incorrectly applies the transaction-based timeframe to a simple inquiry, which is legally limited to three months. The approach focusing on caller ID masking and time-of-day restrictions fails to address the primary regulatory violation regarding the National Do-Not-Call Registry and the expiration of the established business relationship. The approach of relying on verbal consent during a prohibited call is insufficient because the call itself is already a violation if the prospect is on the National Registry and the inquiry window has closed; additionally, updating the internal do-not-call list only annually fails to meet the regulatory requirement to synchronize with the National Registry at least every 31 days. Takeaway: The established business relationship exception for telemarketing is limited to 18 months for customers following a transaction and only 3 months for prospects following an initial inquiry or seminar attendance.

Correct: Under SEC Rule 17a-3 and FINRA record-keeping requirements, a broker-dealer acting as a dealer manager is responsible for maintaining and preserving records related to its associated persons, including Form U4 and background information. While a firm may outsource the administrative processing of these documents to a third party, the legal and regulatory obligation to ensure the records are accurate, complete, and available for inspection remains with the member firm. Incorrect: Relying on a program sponsor is incorrect because the dealer manager, as the member firm, holds the primary registration responsibility for its own associated persons. Limiting records to those receiving transaction-based compensation is incorrect because all associated persons, including wholesalers and supervisors, must have their registration records maintained. Registration as a transfer agent is irrelevant to the broker-dealer’s specific requirement to maintain associated person records under exchange and federal securities laws. Takeaway: A member firm acting as a dealer manager retains ultimate regulatory responsibility for the registration and record-keeping of its associated persons, regardless of any outsourcing arrangements.

Correct: Under FINRA Rule 2310, the total amount of organization and offering (O&O) expenses for a direct participation program, which includes all underwriting compensation and wholesaler fees, is limited to 15% of the gross proceeds of the offering. The principal is responsible for ensuring that the aggregate of all such fees and expenses remains within this threshold to maintain compliance with fairness and reasonableness standards. Incorrect: Requiring a wholesaler to register only as an investment adviser is incorrect because wholesalers involved in the distribution of securities typically must be registered broker-dealers. Charging wholesalers’ fees as a separate surcharge to investors does not exempt those fees from the regulatory caps on offering expenses. Payments to unaffiliated wholesalers are not exempt from the 15% cap; they are explicitly included in the calculation of total organization and offering expenses. Takeaway: Total organization and offering expenses for a DPP, including all compensation to dealer managers and wholesalers, are strictly capped at 15% of gross proceeds.

Correct: Under FINRA Rule 2310, the aggregate offering price is the total dollar amount of the securities being offered. This figure is critical because it is the basis for the 15% cap on total organization and offering (O&O) expenses. Furthermore, within that 15% limit, the rule specifically mandates that underwriting compensation cannot exceed 10% of the gross proceeds (the aggregate offering price). Incorrect: The threshold for releasing funds from escrow in a contingent offering is based on the minimum offering amount specified in the prospectus, not the total aggregate offering price. Subordinated interests and cash flow distributions relate to the program’s economic structure rather than the calculation of offering expense limits. Leverage ratios are typically governed by the partnership agreement and investment objectives rather than being a direct function of the aggregate offering price for regulatory expense capping. Takeaway: The aggregate offering price is the benchmark used to calculate the maximum allowable 15% for organization and offering expenses and the 10% limit for underwriting compensation.

Correct: Under Rule 502(a) of Regulation D, the six-month safe harbor rule stipulates that offerings will not be integrated if there are no offers or sales of the same or similar class of securities by or for the issuer during the six months before the start and the six months after the completion of the offering. This provides a definitive window that prevents the SEC from combining multiple private placements into one, which could otherwise lead to a violation of registration exemptions. Incorrect: Treating the two offerings as one by limiting non-accredited investors is a strategy to maintain an exemption if integration occurs, but it does not satisfy the safe harbor rule itself. Changing the dealer-manager or the geographic location of the assets are factors that might be considered under the SEC’s five-factor test for integration (such as ‘same general purpose’), but they do not meet the specific requirements of the six-month safe harbor, which is strictly based on the timing of sales of similar securities. Takeaway: The six-month safe harbor provides a bright-line test where offerings are not integrated if no similar securities are offered or sold by the issuer in the six months before and after the offering.

Correct: Rule 9110 (Application) establishes that the Code of Procedure (the Rule 9000 Series) applies to all proceedings brought under the series. There are no exemptions or modifications based on the firm’s business model, such as being a captive Dealer Manager or an affiliate of a DPP sponsor. The Dealer Manager’s functions, including due diligence and record-keeping, are subject to standard regulatory oversight and procedural rules to ensure consistency and fairness in the disciplinary process. Incorrect: The approach favoring expedited internal review is incorrect because Rule 9110 does not provide for procedural flexibility or waivers based on the proprietary nature of documents or firm affiliation. The suggestion that Rule 9000 only applies to independent third parties is incorrect because the Code of Procedure applies to all members regardless of their relationship to a sponsor. Finally, performing post-offering investor relations functions does not grant any special legal status or immunity from the standard disciplinary protocols defined in the 9000 Series. Takeaway: Rule 9110 ensures that the FINRA Code of Procedure applies uniformly to all disciplinary and regulatory proceedings involving member firms, regardless of their specific role or affiliation in a Direct Participation Program.

Correct: In a managed offering, the Dealer Manager is responsible for performing due diligence on the issuer and the program, as well as soliciting and allocating participation among other broker-dealers in the selling group. They act as the interface between the issuer and the rest of the broker-dealer community, maintaining the necessary books and records for the syndication process. Incorrect: Providing a firm commitment is a specific type of underwriting commitment and is not a standard requirement for all Dealer Managers, as many DPPs are conducted on a best-efforts basis. Directly supervising the representatives of other firms is the responsibility of those firms’ own principals, not the Dealer Manager. Assuming the role of the program sponsor is a conflict of interest and outside the scope of a broker-dealer’s syndication and distribution functions. Takeaway: The Dealer Manager serves as the central hub for due diligence and the coordination of the selling group in a managed Direct Participation Program offering.

Correct: Under FINRA Rule 2310, underwriting compensation for a public Direct Participation Program (DPP) is strictly limited to 10% of the gross proceeds of the offering. While reimbursements for bona fide due diligence expenses are excluded from this 10% limit, they must be actual expenses incurred and supported by detailed documentation (invoices and receipts). Any non-accountable expense allowance or unsupported marketing reimbursement is classified as underwriting compensation and must fit within the 10% cap. In this scenario, the 9% commission plus the 1.5% unsupported reimbursement equals 10.5%, which exceeds the limit. Incorrect: The 15% cap mentioned in one option refers to the total organization and offering (O&O) expenses, but it does not override the specific 10% sub-limit for underwriting compensation. Comparing compensation to industry standards is not a valid regulatory defense, as the 10% limit is an absolute ceiling. Classifying the payment as a dual-employee expense is incorrect because marketing reimbursements paid to a member firm are specifically governed by the underwriting compensation rules and cannot be bypassed through internal labeling without meeting specific exemptive criteria. Takeaway: Any compensation or expense reimbursement paid to a member firm in a DPP offering that is not a documented bona fide due diligence expense must be included within the 10% underwriting compensation limit.