DPP Marketing: What Are Your Obligations?

Our Panelists Bradford Updike, Mick & Associates

Brett Evans, Hull Evans & Kob LLP

David Cohen, APX Energy, LLC

Amy Knickerbocker, A3K Advertising, Inc.

Topics Covered Today

FINRA Conduct Rules Pertaining to Marketing Materials Rule 502(c) of Regulation D The Rule Today Is it Here To Stay???

FINRA Marketing Rules

NASD Rule 2210 (still in pre-consolidation phase) Advertisements- generally marketing material published or

made available to the public (websites, newspaper articles,

content published on social media sites)

Sales Literature-generally marketing material where the

audience is controlled (fliers, brochures, DPP executive

summaries created by sponsors)

Filing requirements are found in Rule 2210(c)

Content standards are found in Rule 2210(d)

FINRA Marketing Rules (Cont.)

NASD Rule 2211 Institutional Sales Materials-communications

made available to member firms and reps Rule 2210(d) content standards apply

WSPs and education required SR-FINRA-2011-035 A new FINRA Rule is coming soon

Content Standards-Rule 2210(d)

Applies to all communications with the public Such communications must: Be based upon principles of fair dealing Be fair and balanced Provide a sound basis for evaluating the product, service or industry mentioned So…what does all that mean?????

Additional Qualifying Standards Under Rule 2210(d)

Requires prominent disclosure of material risks

Can’t make false, exaggerated, unwarranted, or

misleading statements

No predictions or implications of future performance

There are some special rules for testimonial statements

Product comparisons must be fairly presented

What are Material Facts???

Could the information affect the buying decision of a reasonable

investor?

May not be suitable for all investors

Uncertainty of return

Risk of investment loss

Lack of liquidity

Load and other sponsor compensation

Risks that are special to the industry (e.g., depletion and dry

hole risks for oil and gas investments)

Tax risks and lack of security

The disclosure must have an ability to heighten the

investor’s awareness of the risk

Disclosure of Material Risks

Observations: The number of DPP materials that disclose no risks is frightening B/D use only materials are not exempt from the content standards You must pay attention to the manner that the risks are disclosed in the materials

What is a Performance Projection?

Easy Case: “We believe our investors will realize a 12% annualized return on this investment over the life of the program…” Where most problems arise: Our programs are designed to deliver a 12% IRR to our investors over the life of the program The target distribution is 7% per year

Historic Performance Based Assertions

Not per se disallowed, but… You must include a past performance disclaimer Differences in fund structures must be noted if relevant Differences in underlying assets must be considered Is the same management team involved? You should explain the average is not a reflection of all prior programs

False, exaggerated, and misleading content

Statements of fact must be supported and sometimes footnoted (12 months current) Yield vs. cash-on-cash Sources of distributions (earnings???) Use of superlatives and emotion-driven assertions are discouraged by FINRA Watch out for outdated market/industry data (e.g., explaining the natural gas market in terms of where it was in 2007 and 2008)

Product Comparisons

Examples: Referring to CDs as “Certificates of Depreciation” in DPP marketing Comparing a real estate or oil and gas program opportunity to a publicly traded product Comparing a DPP sponsor’s return record to the S&P Index

Product Comparisons

Require full and fair disclosure of features and risks associated with the comparison products Investment objectives Tax risks Liquidity Market fluctuation risk Fees Safety of principal Observation: It’s very difficult to make a fair product comparison in a one or even two page marketing flier

Superlatives & Problem Phrases

We’ll give your investors “peace of mind” We have a “track record of success” We are “best in class” We deliver a “high yield” opportunity We seek “attractive” returns for investors We’ll help you “sleep at night!” $$$$ Signs, Pots of Gold, Flying Piggy Banks

Past Attitudes & Subjective Challenges

B/D only materials get a free pass—No! The risks are already in the PPM, so does the marketing material need to rehash it? Lack of issuer education on Rule 2210 You can’t supervise the marketing if you don’t understand the product (i.e., due diligence)

Marketing Materials Red Flags

No risk disclosure at all If there is risk disclosure, it’s buried in the footnotes Statements of a target return Lack of past performance qualifiers Outdated statistics Holding alternative investments out to be safe money opportunities

What the Alternative Investment Market Needs

Marketing best practices Reasonable education at the product approval level Get your advertising review staff involved in reviewing materials during the due diligence process

Filing Requirements-Rule 2210(c)

All advertising for new B/D for one year Public DPPs

Why Should You Care

Marketing materials are fair game at cycle audits Problem materials are sent to FINRA enforcement The enforcement investigation process is tough Who received the materials and when? How many of them bought the product? What were the ticket amounts? How much in commissions was made? Fines & Loss of Reputation Heightened FINRA Supervision

When does enforcement get involved?

Projections of performance No risk disclosure The piece is so deficient it evidences a misunderstanding of how the product works

Enforcement Cases

Altegris Investments (Hedge Fund) Nuveen Investments, LLC, $3 million UBS Financial Services, $11 million David Lerner & Associates Words of advice…. Get educated FINRA Advertising Conferences held regularly

Cases Studies

Rule 502(c)

What is a general solicitation? What are the consequences in a Reg. D offering? Where is the rule heading in the future? HR 2940 Access to Capital for Job Creators Act Passed the House