SIE Chapter 9-- Alternative Investments

LLC: General Partner

- Day-to-day manager with unlimited personal liability - Must have at least a 1% interest - Fiduciary toward limited partner - Last in priority at liquidation: 1) Secured Creditor 2) General Creditor 3) Limited Partner 4) General Partner

DPP Individual Investor Tax Treatment

- Investments in direct participation programs and rental activities are considered passive activities - Losses generated by passive activities can only be deducted against income from passive activities (if losses > income, imbalance carries forward indefinitely) - when the ownership interest in a passive activity is sold, the investor can deduct all passive losses that are carried forward against any form of income—passive or non-passive

Real Estate Investment Trusts (REIT): Regulation and Liquidity

- Not regulated by ICA of 1940, regulated by SA of 1930 (they are secs and must send prospectuses to primary market) 3 varieties: 1) registered with SEC, listed-- most common (traded & reported ted at current market value/share) 2) sold under Reg D as private placement, not registered with SEC (illiquid, reported as estimated market value per share) 3) registered with SEC, unlisted/non-traded (illiquid, reported as estimated market value per share)

LLC: Limited Partner

- Passive investor with limited liability (can lose limited liability if they take active role) - Contributor of capital - Has the right to: 1) Lend to the partnership 2) Inspect books 3) Compete - Ways to endanger "limited" status: 1) Negotiate contracts 2) Hire/fire employees 3) Lend their name

Passive vs Active ETFs

- both pay commissions on transactions (no sales charges) passive: - try to mimic an index - lower fees than active active: - try to outperform the market

Hedge Funds: Compensation

- can impose higher fees than the 8.5% of the fund's public offering price - typical fee is "two-and-twenty" which involves a 2% management fee and takes 20% of profits

Real Estate Investment Trusts (REIT): Investor Tax Treatment

- dividends received by REIT investors are taxed as ordinary income. - However, based on the 2018 tax reforms, the following additional benefits are provided: 2) 20% of the income that's distributed by REITs is deductible (excluded from tax). 2) The maximum tax rate on ordinary income has been lowered to 37% (from 39.6%).

Direct Participation Programs (DPPs)

- investment in which the results of the business venture (cash flow, profits, and losses) directly flow through to the investors - different forms including general partnerships, joint ventures, Subchapter S Corporations, and LLCs (main focus)

Limited Liability Corporations (LLCs)

- involves at least 2 partners: a general partner (GP- manages program and must contribute at least 1% of capital) and limited partner (LP- no managerial control, but donate a large portion of capital) - partnership must file a Certificate of Limited Partnership with the state

Hedge Funds: Illiquid

- not required to publish NAV daily - can impose restrictions on withdraws

Real Estate Investment Trusts (REIT)

- portfolio of real estate investments from which investors may earn profits (income from rental income on real estate owned by REIT) - invest in many different types of residential and commercial income-producing real estate 3 types: 1) Mortgage-- borrow from investors, invest in mortgages, earn income on spread between i rates (like banks) 2) Equity-- own and operate income-producing real estate 3) Hybrid-- combo of other 2

Private Equity Funds

- role of raising capital has traditionally been the role of Private Equity (PE) and Venture capital (VC) firms - similar to hedge funds, PE and VC funds raise capital by offering investors limited partnership sold in private placements (under Reg D) - not regulated under ICA of 1940 and have no active trading venues

ETFs

- shares rep interest in underlying basket of securities that typically mirrors a specific index - passive ETFs try to mimic an index, active try to outperform the market Examples: - SPDR- tracks S&P 500 index - QQQ- Tracks NASDAQ 100 index - DIA- tracks Dow Jones Industrial Average

Leveraged ETFs

- short term sec designed to amplify the returns of an index (can be long or short) - uses debt instruments or derivatives such as swaps, futures, and options to amplify the returns of a specific index - reset portfolio daily

Inverse ETFs

- short term sec designed to perform opposite of an index - done by short selling the underlying the securities or through futures and derivatives strategies - often used by investors with long positions as a hedge against a bear market - reset portfolio daily

Hedge Funds: Unregulated

- since offerings are limited to accredited investors, products qualify for exemptions form fed regs - can use strategies that are prohibited for MFs

Exchange Traded Notes (ETNs)

- unsecured debt sec that pays return linked to underlying index/benchmark designed for short term trading Returns-- amount based on performance of underlying index (no interest payments) Issuer Credit Risk-- only backed by full faith and credit of issuer Fee Considerations: 1) reoccurring costs-- fees included in ref index & daily investor fees that lower indicative value (value -daily investor fee) of ETN 2) brokerage commissions payed during transactions

LLC Disadvantages

1) Lack of Control- Limited partners may have no managerial authority regarding the daily business of the partnership (may be no oversight above management like a BoD) 2) Illiquidity- limited partner's investment is normally unable to be sold quickly (no active public market, often have to get permission of GP to sell) 3) Taxes get more complicated (any change in tax laws or adverse IRS rulings could negatively impact a limited partner's future returns) 4) Possible Capital Call- investors in limited partnerships may be asked to contribute additional funds after their initial investment (failure could mean forfeiting interest in project)

LLC Advantages

1) Limited Liability- limited partners cannot lose more than the amount that they have at risk 2) Diversification- limited partnerships invest in assets that have little or no correlation to the stock and bond markets 3) Favorable tax treatment- partnerships are not taxable entities => partnership's income (or loss) is allocated directly to the partners' personal income taxes (it has pass-through treatment and is reported as passive) investors receive tax benefits: -- 20% of the income that's passed through by partnerships is deductible (excluded from tax) -- The maximum tax rate on ordinary income has been lowered to 37% (from 39.6%)

An investor with an investment objective of speculation wants to purchase a security that will increase by the same percentage as a decline in the S&P 500 Index. Which of the following securities should be recommended? A) An inverse exchange-traded fund (ETF) B) A leveraged exchange-traded fund (ETF) C) A leveraged inverse exchange-traded fund (ETF) D) An exchange-traded fund (ETF)

A) An inverse exchange-traded fund (ETF) An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. An inverse ETF based on the S&P 500 Index seeks to deliver the opposite performance of that index. For example, if the S&P 500 rises by 1%, an inverse ETF would decrease by 1%, and if the S&P 500 falls by 1%, the inverse ETF would increase by 1% before fees and expenses are deducted. A leveraged exchange-traded fund (ETF) is suitable if the customer anticipates an increase in the S&P 500 and wants a multiple of that increase. A leveraged inverse exchange-traded fund (ETF) is suitable if the customer wants a return that is a multiple or higher return and anticipates a decrease in the S&P 500. An exchanged-traded fund (ETF) is suitable if the customer only wants to track the return of the S&P 500.

Which of the following investments generally distributes dividends and capital gains, mirrors a securities index, and can be purchased on margin? A) ETF B) Mutual fund C) ETN D) ADR

A) ETF ETFs have a portfolio that generally mirrors a securities index and will distribute the dividends and capital gains that are generated in the portfolio & most are marginable. Some mutual funds are structured to mirror an index; however, mutual fund shares are considered new issues and not initially marginable. ETNs are debt instruments that are structured to provide the return on a wide array of investments, but they don't purchase those securities for their portfolios. ADRs are depository receipts for foreign equities that are trading in U.S. markets.

Which of the following statements BEST describes exchange-traded notes (ETNs)? A) ETNs are debt instruments linked to the performance of a commodity, currency, or index B) ETNs are equity securities that pay a large dividend C) ETNs are mutual funds that invest in debt instruments D) ETNs are equity securities that represent ownership of a securities exchange

A) ETNs are debt instruments linked to the performance of a commodity, currency, or index ETNs are a type of unsecured debt security. This type of debt security differs from other types of fixed-income securities since ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity.

An investor is interested in selling 500 shares of her listed REIT. The sale will be handled in a manner that's similar to the: A) Liquidation of a stock on the NYSE B) Maturity of a DPP C) Liquidation of a hedge fund D) Liquidation of a private placement

A) Liquidation of a stock on the NYSE A secondary market exists for real estate investment trusts (REITs). The vast majority of REITs trade on the NYSE with prices that are determined by the forces of supply and demand.

Which of the following statements is TRUE concerning exchange-traded funds (ETFs)? A) The securities may be used by individuals to pursue a market timing strategy B) The purchase price is based on a net asset value, plus any applicable sales charges C) The securities are priced once a day based on the close of trading D) Transactions in these securities must be executed in a cash account

A) The securities may be used by individuals to pursue a market timing strategy ETFs represent a basket of securities. ETFs are structured to track an index of securities such as the Nasdaq 100, Standard and Poor's 500, or the Dow Jones Industrial Average. Shares are issued and then trade in the secondary market, much like closed-end investment company shares. Shares are purchased and sold on an exchange and may be purchased on margin and sold short. The price of an ETF is based on market sentiment (supply and demand) are changes throughout the trading session. An index fund (a type of mutual fund that also mirrors an index of securities) is priced only once a day, typically at 4:00 p.m. Individuals that pursue a market timing strategy are frequent users of ETFs. Market timers are active investors who trade frequently based up economic trends, technical factors, and corporate information.

Which of the following limited partnerships is the least likely to generate income? A) An existing property limited partnership B) A raw land limited partnership C) A government-assisted housing limited partnership D) A currently producing oil and gas drilling limited partnership

B) A raw land limited partnership A limited partnership that invests in raw land is not designed to generate income. Instead, raw land investments are suitable for investors who are seeking appreciation in the value of the property. Partnerships that invest in existing properties and government-assisted housing properties are types of real estate programs that are more likely to generate income.

Which of the following requires a limited partner to deposit additional funds? A) A tax credit B) An assessment C) Depreciation D) A passive loss

B) An assessment An assessment is a request by the partnership for additional funds. Failure to provide the funds may result in the limited partner's losing her investment interest in the program.

Which of the following is NOT a type of direct participation program (DPP)? A) S Corporation B) C Corporation C) General partnership D) Limited partnership

B) C Corporation Direct participation programs come in many different forms, including S Corporations, general partnerships, and limited partnerships. However, C Corporations do not offer flow through taxation. Instead, income is taxed first at the corporate level and taxed again if it's distributed to shareholders as a dividend.

A registered representative is NOT permitted to exercise discretion as it relates to which of the following investments? A) Mutual funds B) DPPs C) REITs D) Leveraged ETFs

B) DPPs Registered representatives are not permitted to exercise discretion over DPP investments for their clients.

SPDR is considered a type of: A) Index option B) Exchange-traded fund C) Mutual fund D) World currency option

B) Exchange-traded fund Standard & Poor's Depositary Receipt (SPDR) is a type of exchange-traded fund (ETF). It can be used to refer to a specific exchange-traded fund that tracks the S&P 500 or a group of ETFs.

All of the following statements concerning hedge funds are TRUE, EXCEPT the funds: A) May engage in short selling B) Must register under the Investment Company Act of 1940 if offered to U.S. residents C) May borrow funds in an attempt to boost returns D) May concentrate assets in a few positions

B) Must register under the Investment Company Act of 1940 if offered to U.S. residents Hedge funds are investments that resemble mutual funds, but are typically only offered to wealthy investors. Hedge funds often employ aggressive financial strategies such as short selling, the use of leverage (borrowed funds), and placing large bets on individual companies or sectors of the market. These funds are not generally required to register with the SEC due to the accredited status of their investors.

The person who distributes interest in a DPP is referred to as the: A) Distributor B) Syndicator C) Managing partner D) Limited partner

B) Syndicator A syndicator (underwriter) is the person that distributes interests in a direct participation program (DPP).

If a REIT generates at least 75% of its income from rents or mortgage interest, and pays out at least 90% of its income to the shareholders, for tax purposes the income distributed by the REIT will be taxable to: A) The REIT and not the shareholders B) The shareholders and not the REIT C) Both the shareholders and the REIT D) Neither the shareholders nor the REIT

B) The shareholders and not the REIT To qualify as a REIT, it must receive no more than 25% of its revenue from subsidiary (non-real estate) activities and must be structured and established as a trust. Also, the REIT must distribute a minimum of 90% of its income. Shareholders are responsible for paying taxes on the income distributed by the REIT. This income is treated as a nonqualifying dividend for tax purposes.

Which of the following statements concerning ETFs is TRUE? A) These funds are priced once per day. B) These funds' values may fluctuate throughout the trading day. C) Managers of these funds tend to trade individual portfolio positions frequently. D) These funds tend to have very high portfolio turnover.

B) These funds' values may fluctuate throughout the trading day. ETFs resemble unit investment trusts (UITs). A fixed portfolio is constructed either to track a specific index (such as the S&P 500) or a given market segment (such as gold or semiconductors). An ETF's portfolio typically remains constant unless there is a change to the underlying index or one of the individual investments within the fund is affected by a corporate action such as a sale or spin-off. ETFs are normally listed on NASDAQ or a traditional exchange and may fluctuate in price throughout the day as a regular stock would. They have a bid and ask as opposed to the NAV and POP found in mutual funds investments. Commissions are paid when trading ETFs as opposed to sales charges when purchasing mutual funds.

Which of the following descriptions characterizes leveraged exchange-traded funds (ETFs)? A) They are designed to deliver the same performance as an index or other benchmark B) They are designed to deliver a multiple of the performance of an index or other benchmark C) They are designed to deliver the opposite of the performance of an index or other benchmark D) They are designed to deliver a multiple of the opposite performance of an index or other benchmark

B) They are designed to deliver a multiple of the performance of an index or other benchmark A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the DJIA seeks to deliver three times the performance of that index. So, if the DJIA rises or falls by 1%, a leveraged ETF would increase or decrease by 3% before fees and expenses. The other choices include a regular ETF which equals the performance, an inverse ETF which seeks to deliver the opposite of what it is tracking, and a leveraged inverse ETF designed to deliver a multiple of the opposite direction.

Which of the following statements is TRUE concerning registered non-traded real estate investment trusts (REITs)? A) They offer investors the same amount of liquidity as exchange-traded REITs B) They are required to distribute the same percentage of taxable income as exchange-traded REITs C) They are not required to make periodic disclosures that are required of exchange-traded REITs DT) hey are suitable for the same investors as exchange-traded REITs

B) They are required to distribute the same percentage of taxable income as exchange-traded REITs Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.

Which of the following is NOT a pass-through entity? A) Limited Liability Company (LLC) B) Real Estate Investment Trust (REIT) C) C Corporation D) S Corporation

C) C Corporation A pass-through entity is a business that avoids double taxation. Instead, the income passes or flows through to the owners of the business. S Corporations, LLCs and REITs are considered pass-through entities. Income generated by C Corporations is taxed twice (once at the corporate level and again at the investor level); therefore, they are not pass through entities.

Which of the following may be subject to a capital call? A) Mutual funds B) ETFs C) DPPs D) ETNs

C) DPPs In some cases, DPP investors may be required to contribute additional capital (i.e., they may be subject to a capital call). Failure to meet the call could result in the investors forfeiting their initial interest.

If the credit rating of an issuer is lowered, which investment will lose the most value? A) Mutual funds B) Unit investment trusts (UITs) C) Exchange-traded notes (ETNs) D) Exchange-traded funds (ETFs)

C) Exchange-traded notes (ETNs) Although exchange-traded notes (ETNs) are a type of unsecured bond, their rate of return tracks an index. If the issuer of an ETN is unable to pay its investors, the investors don't have claim to any collateral and are general creditors. In other words, ETN investors are exposed to both credit risk and market risk. All of the other products represent ownership in a portfolio, rather than an unsecured bond, and don't have the same degree of credit risk as an ETN.

A customer who has consistently invested in mutual funds is considering a first-time investment in a hedge fund. When comparing mutual funds to hedge funds, which of the following statements is NOT TRUE? A) Mutual funds are subject to more regulatory oversight than hedge funds. B) Hedge funds often use a higher degree of leverage than mutual funds. C) Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately. D) Mutual funds may be suitable for many customers, whereas hedge funds are generally suitable for sophisticated, wealthy investors only.

C) Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately. Both mutual funds and hedge funds pool investors' money to manage the assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.

Which of the following is NOT a benefit of investing in a real estate investment trust (REIT)? A) Stable dividend income B) Liquidity C) Passive losses D) Diversification

C) Passive losses Unlike DPPs, real estate investment trusts (REITs) do not generate passive losses. REITs offer investors stable dividends based on the income being produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange and offer investors liquidity. Since investors typically purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income-earning securities become more attractive.

Which of the following often provides capital to start-up businesses? A) Mutual funds B) ETFs C) Private equity funds D) ETNs

C) Private equity funds Private equity funds often provide capital to start-up businesses.

Which of the following statements concerning hedge funds is TRUE? A) These investments are highly liquid. B) These investments must be registered with the SEC. C) These investments are typically sold to accredited investors. D) These investments may charge a maximum load of 8 1/2 %.

C) These investments are typically sold to accredited investors. Hedge funds are typically sold to accredited investors. As a product, hedge funds can be extremely risky and illiquid.

Which of the following descriptions characterizes inverse exchange-traded funds (ETFs)? A) They are designed to deliver the same performance as an index or other benchmark B) They are designed to deliver a multiple of the performance of an index or other benchmark C) They are designed to deliver the opposite of the performance of an index or other benchmark D) They are designed to deliver a multiple of the opposite performance of an index or other benchmark

C) They are designed to deliver the opposite of the performance of an index or other benchmark An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. For example, an inverse ETF based on the DJIA seeks to deliver opposite performance of that index. So, if the DJIA rises by 1%, an inverse ETF would decrease by 1%, and if the DJIA falls by 1%, the inverse ETF would increase by 1% before fees and expenses. A regular ETF is designed to deliver the same performance as an index or other benchmark. A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. A leveraged inverse ETF is designed to deliver a multiple of the opposite performance of an index or other benchmark.

What is the typical maturity for an ETN? A) 180 days or less B) 270 days or less C) 1 year D) 10 to 30 years

D) 10 to 30 years Exchange-traded notes (ETNs) are long-term securities which typically have maturities between 10 and 30 years.

A REIT will receive preferential tax treatment if it distributes at least what percentage of its income to shareholders? A) 10% B) 20% C) 75% D) 90%

D) 90% If an REIT distributes at least 90% of its ordinary income to shareholders, the income will only be taxed once (at the investors' level).

An equity inverse exchange-traded fund (ETF) is most similar to: A) A real estate investment trust (REIT) B) Buying on margin C) An equity mutual fund D) Selling stock short

D) Selling stock short An equity inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. Similarly, a customer who sells stock short is anticipating a decline in the price of the equity securities. For example, an inverse ETF that's based on the DJIA seeks to deliver the opposite performance of that index. Therefore, if the DJIA rises by 1%, an inverse ETF's value should decrease by 1%. Conversely, if the DJIA falls by 1%, the inverse ETF's value should increase by 1%.

Regarding ETFs, which of the following statements is TRUE? A) ETFs are considered hedge funds by the SEC. B) ETFs may only hold equity positions. C) ETFs grow tax-deferred. D) Typically, ETFs may be sold short.

D) Typically, ETFs may be sold short. ETFs resemble UITs. They may be sold short, purchased on margin, and invest in either equity or debt instruments. A fixed portfolio is typically constructed to either track a specific index (e.g., the Wilshire 5000) or a given market segment (e.g., airlines or medical companies). An ETF's portfolio typically remains constant unless there is a change to the underlying index or in one of the individual investments within the fund. Since ETFs are not hedge funds, there is no requirement for the investors to be accredited.

Crunch Time Fact #4

Direct participation programs (DPPs) are businesses that pass-through both income and losses to their owners (i.e., they are flow-through investment vehicles which allow investors to "participate in earnings")

ETFs vs Mutual Funds

ETF: - trade on exchange - prices determined by supply and demand - lower expenses than MFs - shares can be bought and sold on margin - more liquid than MFs

Crunch Time Fact #2

ETFs are exchange-traded products that represent an interest in a stock portfolio that tracks an index.

Crunch Time Fact #3

ETFs distribute gains, dividends, and interest.

Comparison of Alternative Investments

ETFs: - secondary mkt: yes - ICA of 1940: yes - Marginable: yes ETNs: - secondary mkt: yes - ICA of 1940: no - Marginable: yes Hedge Funds: - secondary mkt: no - ICA of 1940: no - Marginable: no Private Equity Funds: - secondary mkt: no - ICA of 1940: no - Marginable: no REITs: - secondary mkt: Generally - ICA of 1940: no - Marginable: Generally DPPs: - secondary mkt: Limited - ICA of 1940: no - Marginable: no

Types of LLCs: Oil and Gas

Exploratory-- wildcatting- involves searching for oil and gas in unproven areas (high risk ventures) Developmental-- leases are acquired for the right to drill in proven areas. High deductability, but lower risk/reward than wildcatting due to participating in areas already heavily commercialized Balanced-- both exploratory and developmental drilling Income-- acquires interests in already producing wells from oil and gas operators that have completed the drilling and have chosen to sell the reserves, rather than holding and operating the sites. Most conservative option

DPP Offering Practices

GP/program sponsor raises money through a public or private securities offering: - Public-- GP hires underwriter/syndicator (max compensation is 10% amt being sold), registers interests with SEC, and discloses to investors with prospectus (interests are unlisted and illiquid). Purchasers must be accepted by GP - Private-- sponsor attempts to locate investors without the assistance of an underwriter. Under Reg D (exempt from registration), and investor disclosure happens through offering memorandum.

Crunch Time Fact #1

If an investor is interested in income, a raw land investment is unsuitable.

Real Estate Investment Trusts (REIT): Tax Treatment

REITs can get special tax treatment if: 1) At least 95% of its gross income must be derived from dividends, interest, and rents from real property. 2) At least 75% of its gross income must be derived from real property income (e.g., rents or interest). 3) No more than 30% of its gross income may be derived from the sale or disposition of stock or securities that have been held for less than 12 months. - if 90% of income is distributed to investors, income will only be taxed once (at investor's level)

LLCs: Discretionary Accounts

RRs are not permitted to exercise discretion when recommending a DPP, a customer's written approval is required to be obtained prior to purchase.

LLCs: Investor Certification

RRs: - required to certify that they have informed their customers of all relevant facts relating to both the lack of marketability and liquidity of limited partnerships - must have reasonable grounds to believe that their customers have sufficient net worth and income to withstand the potential loss of their entire investment

Types of LLCs: Real Estate

Raw land-- undeveloped land for capital appreciation (offer no depreciation deductions and little or no periodic income) New Construction-- primarily for capital appreciation (& potentially cash flow). Usually involves leverage (borrowing) Existing Properties-- primarily to purchase existing commercial properties and apartments. Highly predictable, have immediate cash flow and availability of depreciation allowances Government Assisted Housing-- provide low-cost housing for low-income families. Associated costs qualify for tax credits. Most programs part of Section 8, admin by HUD dept

LLCs: Risk Summary

Risks include: - Management ability of the general partners - Illiquid nature of limited partnership units - Possible loss of capital and unpredictability of income - Ability of the investor to pay any potential future assessments - Rising operating costs - Availability of good properties or leases - Changes in the tax laws and government regulations - Economic and environmental occurrences (e.g., an energy crisis)

Crunch Time Fact #6

Since ETNs are unsecured and backed only by the issuing institution's full faith and credit, a downgrading of the issuer's credit rating will have a significant impact.

Crunch Time Fact #5

Two risks that are specific to ETNs include credit risk and market risk.

When selling limited partnership interests, a registered representative is NOT required to: A) Certify that the customer is an institution B) Ensure that she has disclosed to the customer the investment's lack of liquidity C) Ensure that the customer has a net worth to sustain a total loss of the investment D) Ensure that the limited partnership investment is suitable for the customer

When selling limited partnership interests, a RR is required to ensure that she informed the customer of all relevant facts relating to the investment's lack of marketability and liquidity. The RR must also have reasonable grounds to believe the customer has sufficient net worth and income to lose his entire investment, or has other liquid assets. The RR must certify that the customer is suitable and is in a financial position to be investing in limited partnership interests. However, there is no requirement to certify that the customer is an institutional investor. Keep in mind, there is a difference between an accredited investor (e.g., a person who has net worth of at least $1,000,000 or annual income of at least $200,000), which is defined under Regulation D, and an institutional investor (a financial institution or an account with at least $50 million of invested assets), which is defined by FINRA.

Hedge Funds

private investment pools - not required to register with SEC under ICA of 1940 - often sold under a Reg D (private placement) exemption - unique risks: -- lack of liquidity -- use of investment as leverage by owner - high min initial investments-- >= 1,000,000