Sponsor Conflict Of Interest

An investor evaluating two programs finds that Program A already owns and identifies each specific property it holds, while Program B is a blind pool that has not yet identified any specific assets it will acquire. Which aspect of program evaluation is most directly harder to perform for Program B at the time of the offering?

1. A.The tax treatment of the entity holding the program's assets.Wrong. Tax treatment depends on the entity's structure, which is known regardless of whether specific assets have been identified.
2. B.The valuation and risk characteristics of the specific assets the program will hold.Correct. A blind pool has not identified its assets yet, so investors cannot evaluate their valuation or risk characteristics at the time of the offering.
3. C.The sponsor's historical track record on prior programs.Wrong. The sponsor's track record is equally available for evaluation for both a blind pool and a program with identified assets.
4. D.The liquidity provisions disclosed in the offering documents.Wrong. Liquidity provisions are disclosed in the offering documents regardless of whether specific assets have been identified.

Why: Evaluating a program includes assessing the valuation and characteristics of its specific assets -- risk factors, conflicts of interest tied to a particular property, and whether the price paid was reasonable. A blind pool has not yet identified those assets, so an investor cannot evaluate them at the time of the offering and must instead rely on the sponsor's stated acquisition criteria and track record until specific properties are actually acquired. Program A's already-identified properties can be evaluated directly, which is a real informational advantage a blind pool structure does not offer at the offering stage.

Under Regulation Best Interest, a representative recommends a DPP to a retail customer that pays her a materially higher commission than a reasonably comparable alternative product she also had available to recommend. The DPP is otherwise suitable for the customer under a traditional suitability analysis. What additional obligation does Regulation Best Interest impose regarding this compensation difference?

1. A.None beyond traditional suitability, since Regulation Best Interest does not address a representative's own compensation in any wayWrong. Regulation Best Interest specifically addresses conflicts of interest arising from a representative's compensation.
2. B.An outright prohibition on ever recommending a product that pays a representative a higher commission than an available alternative, regardless of disclosureWrong. This overstates the rule as an absolute prohibition rather than a disclosure and mitigation duty.
3. C.A requirement that the representative always recommend whichever available product pays her the lowest commission, regardless of the products' other differencesWrong. There is no such lowest-commission mandate; the obligation is to disclose and address the conflict, not to always choose the lowest-paying product.
4. D.A duty to disclose and appropriately address the conflict of interest created by the higher compensation, separate from and in addition to the suitability of the recommendation itselfCorrect. Regulation Best Interest imposes a separate conflict-of-interest disclosure and mitigation duty beyond traditional suitability.

Why: Regulation Best Interest separately requires disclosing and appropriately addressing conflicts of interest created by compensation differences, an obligation distinct from whether the recommendation itself is suitable.