A program feature, common in non-traded DPPs and non-traded REITs, under which the sponsor may (but is typically not obligated to) repurchase units directly from investors at a stated price, often at a discount to the estimated per-unit value and subject to caps on the dollar amount or percentage of units redeemed in a given period; it is not a public secondary market and provides limited, not assured, liquidity.
Practice questions using Redemption Plan
Original questions written against the published FINRA and NASAA exam content outlines — not actual exam questions. Every choice is explained.
A customer's account statement shows an estimated per-unit value for her non-traded DPP position. She asks her representative whether that is the amount she would actually receive if she requested a redemption through the program's redemption plan. What should the representative tell her?
A.Yes -- the estimated per-unit value is exactly what the redemption plan will pay if she submits a request.Wrong. The redemption plan is a separate mechanism with its own terms and may pay less than, or be unavailable at, the estimated value.
B.Yes, provided she submits her redemption request within the same quarter the value was last updated.Wrong. Timing relative to the valuation date does not guarantee the redemption plan will pay the estimated value; the plan's own separate terms and limits govern.
C.No, because non-traded programs never offer any redemption mechanism to investors.Wrong. Many non-traded programs do offer a limited redemption plan; the point is that its terms are separate from, and may not match, the estimated per-unit value.
D.No -- the estimated value and what the redemption plan will actually pay are governed by separate terms, and the plan may pay less, be limited, or be suspended.Correct. The statement figure is a periodic valuation; actual redemption proceeds depend on the redemption plan's own separate terms and limits.
Why: The estimated per-unit value on a statement is a periodic valuation, not a redemption price. A program's redemption plan is a separate mechanism with its own terms, and it may pay less than the stated estimated value, may be limited in the amount it will redeem in a given period, or may be suspended altogether. The representative should make clear that the statement figure and what she could actually realize through a redemption request are two different things, governed by different terms.
A representative recommends that a customer redeem an existing DPP position through the program's limited redemption plan, at a price below the position's estimated per-unit value, in order to fund a subscription to a different, unrelated program that pays the representative a new sales commission. Nothing about the customer's objectives, risk tolerance, or circumstances has changed since the original purchase. Is this recommendation consistent with the representative's suitability obligation?
A.Yes -- so long as the new program is itself suitable for the customer, the switch itself raises no separate concern.Wrong. The new program being suitable in isolation does not address the separate problem of switching out of an existing position at a discount without any change in circumstances justifying it.
B.Yes, provided the representative discloses that the redemption plan will pay less than the position's estimated value.Wrong. Disclosure of the discount does not cure the underlying suitability problem of an unjustified switch generating a new commission.
C.No, but only because redemption plans are never a permissible way to exit a DPP position under any circumstances.Wrong. Redemption plans are a legitimate, if limited, exit mechanism; the problem here is the unjustified switch, not the use of the redemption plan itself.
D.No -- without a change in the customer's circumstances justifying it, recommending the switch to generate a new commission raises a suitability concern.Correct. A switch has to be justified by an actual change in the customer's situation; generating a new commission without such a change is the problem.
Why: A recommendation to exit one illiquid position at a discount specifically to fund a new commission-generating purchase, without any change in the customer's circumstances that would justify the switch, raises the same kind of concern as excessive trading in a liquid account -- the transaction serves the representative's compensation rather than any genuine change in what the customer needs. Suitability requires more than each individual leg looking defensible in isolation; a switch has to be justified by the customer's actual situation, not simply be available to recommend.
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