Investor Suitability Standards

An investor completes and signs the subscription agreement for a limited partnership and delivers payment to her broker-dealer. At what point does she become a limited partner?

1. A.When she signs the subscription agreementWrong. Signing binds her own offer but creates no partnership interest.
2. B.When her payment is deposited by the broker-dealerWrong. Receipt of funds by the firm is not acceptance by the program.
3. C.When the general partner accepts her subscription and admits herCorrect. These sales are conditioned on the issuer accepting the subscriber.
4. D.When the broker-dealer's principal approves the order formWrong. Supervisory approval is internal to the member and does not admit anyone to the partnership.

Why: A subscription is an offer to buy that the program must accept, and the investor becomes a limited partner when the general partner accepts the subscription and admits her under the partnership agreement. Signing and paying complete the investor's side of the transaction but create no partnership interest by themselves, which is why these sales are described as conditioned upon the issuer's acceptance of subscribers. The general partner can decline a subscription, for instance where the investor does not meet the program's stated investor suitability standards. Had the question asked when the investor becomes bound to her own offer, the answer would be on signing.

A registered representative takes a completed subscription order form from a customer for a non-traded program. Before the form goes to the sponsor, what does the member's supervisory obligation require?

1. A.Nothing, because the general partner performs a suitability review on acceptanceWrong. The issuer's acceptance decision does not discharge the member's own supervisory duty.
2. B.The representative's own written attestation that the subscription is suitableWrong. A representative cannot supply the supervisory review of his own order.
3. C.Approval by the sponsor's due diligence officer before transmissionWrong. The sponsor's personnel are not supervisors of the member.
4. D.Review by an appropriately qualified principal, with the record retainedCorrect. Principal review before transmission is the member's obligation and it must be documented.

Why: The order must be reviewed by an appropriately qualified principal of the member before it is transmitted, and the record of that review must be retained. The review is where the firm tests the subscription against the program's stated investor suitability standards and its own written procedures, and it is the last point at which an unsuitable subscription can be stopped. The obligation sits with the member because the member made the recommendation and handled the customer's funds. If the sponsor later rejects the subscription, that is a separate decision and no substitute for the member's own review.