Study guide
7.3 DPP Suitability and Risks
Series 7 General Securities Representative
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1 Introduction
About the Series 7 How to Use This Guide
2 Chapter 1: Equity Securities
1.1 Common Stock Basics 1.2 Dividends and Stock Splits 1.3 Preferred Stock 1.4 Rights and Warrants 1.5 ADRs and Foreign Securities
3 Chapter 2: Debt Securities
2.1 Bond Fundamentals 2.2 Bond Yields and Pricing 2.3 Corporate Bonds 2.4 Bond Features and Risks
4 Chapter 3: U.S. Government & Agency Securities
3.1 Treasury Securities 3.2 Agency Securities 3.3 Mortgage-Backed Securities 3.4 Money Market Instruments
5 Chapter 4: Municipal Securities
4.1 Municipal Bond Basics 4.2 General Obligation Bonds 4.3 Revenue Bonds 4.4 Municipal Bond Analysis 4.5 Municipal Securities Rules
6 Chapter 5: Investment Companies
5.1 Investment Company Basics 5.2 Mutual Funds (Open-End Funds) 5.3 Mutual Fund Pricing and Fees 5.4 Closed-End Funds and ETFs 5.5 Investment Company Taxation
7 Chapter 6: Variable Products & Annuities
6.1 Annuity Basics 6.2 Variable Annuities 6.3 Annuity Taxation 6.4 Variable Life Insurance
8 Chapter 7: Alternative Investments & DPPs
7.1 Direct Participation Program Basics 7.2 Types of DPPs 7.3 DPP Suitability and Risks 7.4 Real Estate Investment Trusts (REITs) 7.5 Hedge Funds and Other Alternatives
9 Chapter 8: Options
8.1 Options Basics 8.2 Long and Short Option Positions 8.3 Hedging Strategies 8.4 Spreads and Combinations 8.5 Index and Non-Equity Options 8.6 Options Account Requirements
10 Chapter 9: Customer Accounts
9.1 Account Types 9.2 Cash Accounts 9.3 Margin Accounts 9.4 Margin Calculations 9.5 Fiduciary and Institutional Accounts
11 Chapter 10: Retirement & Education Plans
10.1 ERISA and Qualified Plans 10.2 Defined Benefit vs. Defined Contribution 10.3 Individual Retirement Accounts 10.4 Education Savings Plans 10.5 Plan Distributions and Taxation
12 Chapter 11: Securities Markets & Trading
11.1 The Primary Market 11.2 The Secondary Market 11.3 Order Types and Execution 11.4 Trade Settlement and Reporting 11.5 Market Participants
13 Chapter 12: Rules, Regulations & Ethics
12.1 Regulatory Framework 12.2 Suitability Requirements 12.3 Communications with the Public 12.4 Prohibited Activities 12.5 Customer Protection Rules 12.6 Ethics and Professional Conduct
7.3 DPP Suitability and Risks
Key Takeaways Explain This Topic AI
FINRA Rule 2310 governs how member firms may participate in and recommend DPP offerings, capping total organization-and-offering expenses at 15% of gross proceeds.
The suitable DPP investor has high net worth, a high tax bracket, a long horizon, low liquidity needs, and high risk tolerance.
Liquidity risk is the most significant DPP risk because there is no secondary market for limited-partnership interests.
Recourse debt adds to an LP's at-risk basis (more deductible losses) but also to personal liability; non-recourse debt does not add to basis except for qualified real estate.
On dissolution, secured creditors are paid first, then general creditors, then limited partners, and general partners last.
Last updated: June 2026
FINRA Rule 2310: Suitability and the Expense Cap
FINRA Rule 2310 sets the standards member firms must meet before selling a DPP. Two ideas dominate the exam.
First, the firm must have reasonable grounds to believe the program is suitable, based on the customer's financial situation, needs, and ability to bear economic risk , and must disclose all material facts (objectives, risks, fees, conflicts, tax features).
Second, Rule 2310 limits organization-and-offering (O&O) expenses — sales commissions, marketing, due-diligence, and formation costs — to no more than 15% of the gross proceeds of the offering. This protects investors by ensuring at least 85% of their money reaches the actual venture. "Use of proceeds" questions hinge on this 15% ceiling: if a program's offering documents show only 70 cents of each dollar going to the investment, fees are excessive and the deal fails the rule.
Rule 2310 also bars a firm from participating in a DPP unless it has conducted reasonable due diligence on the issuer and the GP, and it prohibits a member from being compensated in ways that are not fully disclosed. The same rule limits the broker-dealer's affiliation: a firm cannot recommend a program in which it has an undisclosed conflict. The practical exam takeaway is that DPP suitability is a two-layer test — the program itself must be sound (firm-level due diligence) and appropriate for the specific customer (account-level suitability).
The Suitable DPP Investor
DPPs are appropriate only for a narrow profile.
- Factor Suitable Profile
- Net worth High — often $1,000,000+
- Tax bracket High marginal bracket (can use the deductions)
- Time horizon Long, typically 7–10+ years
- Liquidity needs Low — money can be tied up for years
- Risk tolerance High
- Existing portfolio Already diversified; DPP is a small slice
- Sophistication Understands complex, illiquid securities
Not suitable: investors needing liquidity or current income certainty, those in low tax brackets (the deductions are wasted), conservative investors, short-horizon investors, and the unsophisticated. A retiree living on a fixed income who might need the principal back within a few years is the classic wrong customer, even if wealthy, because the money can be locked up for a decade.
Watch how the exam stacks facts. A 40-year-old in the 37% bracket with a $3 million liquid net worth, an existing diversified portfolio, and no near-term cash needs is an ideal candidate. Change one fact — say the customer will need the funds for a home purchase in two years — and the recommendation becomes unsuitable on liquidity grounds alone. Suitability is judged on the customer's full profile, not just net worth.
The Five Core DPP Risks
Liquidity risk (MOST significant) — no secondary market; an LP who must exit early may find no buyer or accept a steep discount.
Business/economic risk — wells come up dry, properties lose value, equipment becomes obsolete, leases default.
Legislative/tax risk — Congress can shrink or repeal the deductions, or the IRS can disallow them; the value proposition can vanish.
Management risk — the GP may be inexperienced, conflicted, or charge excessive fees.
Leverage risk — borrowed money magnifies both gains and losses and, with recourse debt, personal exposure.
Recourse vs. Non-Recourse Debt
The distinction controls both at-risk basis (how much loss an LP can deduct) and personal liability.
- Recourse Debt Non-Recourse Debt
- Who lender can pursue Partnership assets and partners personally Only the partnership assets/collateral
Effect on LP at-risk basis Increases basis → more deductible losses Does not increase basis...
Real-estate exception n/a ... except qualified non-recourse real-estate financing, which does add to basis
Exam logic: recourse debt is a double-edged sword — it boosts the deductions an LP can claim but also makes the LP personally liable for that share. Non-recourse debt generally does not add to basis, with the important real-estate carve-out.
Liquidation Priority
When the partnership dissolves, claims are paid in this order:
- Order Claimant
- 1st Secured creditors
- 2nd General (unsecured) creditors
- 3rd Limited partners (return of capital, then any profits)
- 4th General partners
Memory aid: SGLG — S ecured creditors, G eneral creditors, L imited partners, G eneral partners. Creditors always precede owners; among owners the GP is last because the GP bears unlimited liability for the partnership's debts.
Within the limited-partner tier, the order is return of capital first, then any profit allocation — an LP recovers their investment before sharing in residual gains. The GP sits last among claimants because the GP carries unlimited liability and is expected to make the partnership's creditors whole; in a failed program, GPs frequently recover nothing.
Apply this to a quick scenario: a partnership liquidates with $1 million after the secured lender is repaid, owing $400,000 to unsecured trade creditors. Those general creditors are paid in full first, leaving $600,000 for the limited partners' return of capital before the GP sees a dollar.
Exam trap: Students reverse "limited partners before general partners." LPs are paid before GPs, but only after every creditor is satisfied.