Sponsor

A pension plan trustee with no professional investment background genuinely does his best, spends considerable personal time researching a DPP sponsor, and honestly believes the investment is sound before committing a large portion of plan assets to it. Is his good-faith personal effort sufficient to satisfy his fiduciary duty of prudence?

1. A.Yes -- a trustee who acts in good faith and does his personal best has satisfied the duty of prudence regardless of his expertise.Wrong. The prudent-expert standard is objective and measured against professional-level care and skill, not against the trustee's personal sincerity or effort.
2. B.No -- the duty of prudence is measured against the standard of a prudent expert familiar with such matters, which good-faith personal effort alone does not satisfy.Correct. A trustee lacking relevant expertise must acquire it or obtain it from a qualified expert; the standard is objective, not a measure of sincere personal effort.
3. C.Yes, provided he documents the hours he spent researching the sponsor before making the decision.Wrong. Documenting time spent does not establish that the decision met the objective prudent-expert standard.
4. D.No, but only because pension plans specifically require professional investment credentials for anyone serving as trustee.Wrong. There is no categorical credentialing requirement to serve as trustee; the issue is that the decision itself must meet the prudent-expert standard, however that expertise is obtained.

Why: ERISA measures a fiduciary's conduct against the standard of a prudent expert familiar with such matters, not against the trustee's own personal effort or sincerity. A trustee who lacks the relevant expertise is expected to either acquire it or obtain it from a qualified expert before making the decision; good-faith diligence from someone without the relevant background does not, by itself, satisfy a standard that is measured against what a knowledgeable professional would have done.

A program distribution involves a sponsor, a dealer-manager and several retail broker-dealers selling to their own customers. Which contractual arrangements govern the relationships?

1. A.A single master agreement signed by the sponsor and every participating firmWrong. The retail firms are not in contract with the sponsor.
2. B.Separate agreements between the sponsor and each retail broker-dealerWrong. That bypasses the dealer-manager, which is the party the sponsor contracts with.
3. C.A partnership agreement to which each selling firm becomes a partyWrong. The partnership agreement governs the program's partners, not its distributors.
4. D.A dealer-manager agreement with the sponsor and selling agreements beneath itCorrect. The distribution runs through a chain of two distinct contracts.

Why: There are two distinct contracts: the dealer-manager agreement between the sponsor and the dealer-manager, and the selling agreements between the dealer-manager and each participating broker-dealer. The retail firms are not in contract with the sponsor, which is why their compensation and obligations come through the selling agreement rather than directly from the program. Keeping the two separate matters because a term the sponsor agreed with the dealer-manager does not automatically bind a selling group member. Had a retail firm dealt directly with the sponsor without a dealer-manager, a single agreement between them would do the work of both.

Which oil and gas interest gives its owner a share of production revenues without any share of the program's costs, beginning with the first barrel sold?

1. A.A working interest held by a limited partner in the programWrong. Sharing the program's costs is precisely what defines this interest.
2. B.A reversionary working interest retained by the program sponsorWrong. It is cost-free, but nothing is paid on it until investors have recovered their costs.
3. C.An overriding royalty interest carved out of the underlying leaseCorrect. It is cost-free and measured against total production, so it pays from the outset.
4. D.A general partnership interest in the drilling program itselfWrong. A general partner shares costs and, beyond that, carries unlimited liability for the partnership.

Why: The outline defines an overriding royalty interest as one whose owner does not share program costs and who shares in revenues through a cost-free interest in production revenues, payable under an oil and gas lease out of the total production of the well or deposit. Because it is carved out of production rather than out of profit, it pays as soon as the well produces and continues whether or not anyone recovers an outlay. That is what separates it from a reversionary working interest, which is equally cost-free but deferred until investors reach payout. Convert the same interest into a working interest and the owner would begin funding drilling and operating costs from the start.

A DPP's offering documents disclose an anticipated holding period for the investment. How should this figure generally be understood?

1. A.As a legally binding maximum period after which the sponsor must return investors' capital in full.Wrong. The anticipated holding period is not a legally binding maximum requiring the sponsor to return capital by a set date.
2. B.As a guarantee that the investment will become liquid on or before that date.Wrong. The stated period is an estimate, not a guarantee that liquidity will actually occur by that date.
3. C.As the sponsor's estimate of how long the investment is expected to be held before a liquidity event, which can extend beyond that estimate depending on market conditions.Correct. The anticipated holding period is the sponsor's estimate of expected timing, which market conditions can extend beyond the original projection.
4. D.As a minimum period investors are legally required to hold the investment before any distribution can be made.Wrong. It is not a minimum holding requirement governing when distributions may be made; it describes the program's expected overall timeline, not a distribution restriction.

Why: The anticipated holding period in a DPP's offering documents represents the sponsor's estimate of how long the program expects to hold its underlying assets before a liquidity event, such as a sale of the portfolio, occurs. It is not a binding maximum, a guarantee, or a legal deadline; market conditions, the difficulty of finding buyers at acceptable prices, and other factors can extend the actual holding period well beyond the original estimate. Evaluating a DPP for suitability means treating this figure as a planning estimate, not a firm commitment, and preparing for the possibility that actual illiquidity lasts longer.