2.3 Direct Participation Programs (DPP)
An agent must obtain written verification of an investor's net worth for which of the following investments? A) Real estate investment trusts. B) Unit investment trusts. C) Variable contracts. D) Direct participation programs.
Answer: D DPPs require complete financial disclosure because of minimum suitability standards set by the states in which they are sold. REITs, unit investment trusts, and variable contracts do not have specific net worth suitability requirements for investors.
In discussing a direct participation program with your customer, rank the following items in order of importance from most to least. Tax write-offs. Liquidity and marketability. Potential for economic gain. A) III, II, I. B) III, I, II. C) I, II, III. D) II, III, I.
Answer: B A program's economic viability is the first priority in the assessment of DPPs. The IRS considers programs designed solely to generate tax benefits abusive. Because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority.
Which of the following must be considered in evaluating the suitability of a DPP investment for a customer? Risk tolerance. Other holdings. Financial situation. Age. A) II and III. B) I, II, III and IV. C) I and II. D) I and IV.
Answer: B The key here is to recognize that with DPPs, the customer's age is a relevant consideration in determining suitability. DPPs are long-term, illiquid, and high-risk investments. It is unlikely that DPPs would be suitable for a customer near retirement age, regardless of the customer's financial situation.
An investor in a high tax bracket who invested in a DPP should have which of the following characteristics? Need for tax benefits. Substantial liquid assets. Ability to identify both risks and merits of the program. Ability to commit money for a long time. A) I and II. B) II and III. C) II, III and IV. D) I, II, III and IV.
Answer: D DPPs are appropriate for investors who can benefit from substantial tax deductions or credits, are not bothered by illiquidity, understand the business risks and benefits involved, and can stay in the program until completion. Reference: 2.3.5 in the License Exam Manual.
