FINRA Rule 11581

FINRA Rule 11581 sits within the 11500 Delivery of Securities with Restrictions subsection of the 11000 Uniform Practice Code as its thirteenth and final rule, immediately following FINRA Rule 11580's transfer of limited partnership securities mandate and immediately preceding FINRA Rule 11600, the series-level marker for the Delivery of Bonds and Other Evidences of Indebtedness subsection.

A Rule That Points Rather Than Reproduces

FINRA Rule 11581's defining characteristic, when considered alongside the standardized forms this dictionary has examined throughout its coverage of the Uniform Practice Code, is what it does not do. FINRA Rule 11130's Supplementary Material .01 reproduced the full text of the two Standard Forms for when, as and if issued/distributed contracts. 

FINRA Rule 11210's Supplementary Material .01 reproduced the structure of the Uniform Comparison Form. 

FINRA Rule 11360's Supplementary Material .01 reproduced the Uniform Delivery Ticket Form. 

FINRA Rule 11550's Supplementary Material .01 reproduced the Uniform Transfer Instruction Form. 

FINRA Rule 11571's Supplementary Material .01 reproduced a Sample Certificate and Authorizing Resolution. 

FINRA Rule 11574's Supplementary Material .01 reproduced a Sample Limited Partnership Change of Trustee Form.

FINRA Rule 11581, by contrast, reproduces nothing. Its entire operative content is a citation — the forms required by Rule 11580 are published in NASD Notice to Members 96-14 (March 1996), pp. 70-75. Rather than incorporating the forms' content into the FINRA Rulebook itself (whether directly in rule text or in Supplementary Material), FINRA Rule 11581 directs the reader to a specific external publication — a Notice to Members from March 1996, with the forms located at a specific page range (pages 70 through 75) within that notice.

Why This Structural Choice Makes Sense for Limited Partnership Transfer Forms

This pointing-rather-than-reproducing structure, while unique among the standardized-form provisions this dictionary has examined, is not arbitrary — it reflects characteristics specific to the limited partnership transfer forms context that distinguish it from the other Uniform Forms.

The other Uniform Forms this dictionary has examined — the Uniform Comparison, Uniform Delivery Ticket, and Uniform Transfer Instruction Form — represent a small, closed set of forms (the 1971 Four Uniform Forms, of which this dictionary has now confirmed three) applicable across the entire range of securities transactions the Uniform Practice Code governs. 

These forms' relative simplicity and universal applicability may have made direct reproduction within the FINRA Rulebook's Supplementary Material both practical and valuable — a single form, applicable to virtually every transaction, reproduced once within the rule that establishes it.

The limited partnership transfer forms that FINRA Rule 11580 mandates and FINRA Rule 11581 references, by contrast, address a more specialized context — and the six pages (70 through 75) of Notice to Members 96-14 devoted to these forms suggests they may comprise multiple distinct forms, or forms with more extensive content, than the relatively compact single-page forms this dictionary has examined for the Uniform Comparison, Uniform Delivery Ticket, and Uniform Transfer Instruction Form. Given this dictionary's earlier examination of FINRA Rule 11574's Supplementary Material .01 Sample Limited Partnership Change of Trustee Form — itself a fairly elaborate form with numerous fields for assignor, assignee, partnership, and General Partner information — it is plausible that the full set of limited partnership transfer forms FINRA Rule 11580 mandates encompasses multiple such forms addressing different transfer scenarios (outright sales, gifts, transfers upon death, changes of trustee, and so forth), making a six-page treatment in a dedicated Notice to Members publication a more practical home for these forms than direct reproduction within FINRA Rule 11581's own Supplementary Material.

NASD Notice to Members 96-14 as the Forms' Permanent Home

FINRA Rule 11581's citation to NASD Notice to Members 96-14 (March 1996), pp. 70-75 identifies a specific historical document — a Notice to Members issued by the NASD in March 1996, shortly after FINRA Rule 11580 and FINRA Rule 11581's original adoption effective January 29, 1996 through SR-NASD-95-53. This dictionary has encountered Notice 96-14 once before — in connection with FINRA Rule 11100's amendment history, where this dictionary noted Notice 96-14 as one of FINRA Rule 11100's selected notices, and speculated that Notice 96-14 might have addressed a package of Uniform Practice Code amendments including both FINRA Rule 11100 refinements and FINRA Rule 11580's original adoption.

FINRA Rule 11581's confirmation that Notice 96-14 contains, at pages 70 through 75, the actual limited partnership transfer forms themselves substantiates this earlier speculation directly — Notice 96-14 was indeed a substantial publication addressing multiple aspects of the Uniform Practice Code's 1996 amendments, of sufficient length that a six-page form appendix at pages 70 through 75 would fit within a notice also addressing FINRA Rule 11100 amendments and the substantive adoption of FINRA Rules 11580 and 11581 themselves.

The continued vitality of this 1996 citation — confirmed as still operative on the current FINRA.org page, notwithstanding the rule's intervening 2010 amendment — means that NASD Notice to Members 96-14 functions, nearly three decades after its original publication, as the permanent authoritative source for the limited partnership transfer forms FINRA Rule 11580(a) mandates. A member seeking to comply with FINRA Rule 11580(a)'s standard transfer forms requirement must, per FINRA Rule 11581, look to this specific 1996 Notice to Members publication to find the forms themselves.

FINRA Rule 11581 as the Capstone of the FINRA Rule 11500 Subsection

FINRA Rule 11581's position as the final rule of the FINRA Rule 11500 subsection — the largest subsection of the entire 11000 Uniform Practice Code, as this dictionary's FINRA Rule 11500 entry established — provides a fitting structural conclusion to this dictionary's examination of that subsection's thirteen entries.

The FINRA Rule 11500 subsection began with FINRA Rule 11510's single-sentence good delivery rule for temporary certificates, proceeded through FINRA Rule 11520's mutilated securities and coupon endorsement framework, FINRA Rule 11530's called and worthless securities provisions, FINRA Rule 11540's governmental documentation and foreign stoppage framework, FINRA Rule 11550's comprehensive assignment and power of substitution framework with its Uniform Transfer Instruction Form, FINRA Rule 11560's ownership transfer indemnification for transfer-books-closed companies, and the FINRA Rule 11570 cluster's four registration-name-specific rules (FINRA Rules 11571 through 11574) — before arriving at FINRA Rules 11580 and 11581's limited partnership transfer framework, the operative expansion of FINRA Rule 11100(a)(5)'s Direct Participation Program exclusion this dictionary anticipated from its earliest entries in this series.

FINRA Rule 11581's brief, citation-only character — in contrast to the elaborate multi-paragraph frameworks of FINRA Rules 11550 and 11574 that preceded it in this dictionary's examination — provides a fitting bookend to this progression. Where FINRA Rule 11510 opened the subsection with the shortest substantive rule in the entire FINRA Rule 11500 subsection (a single sentence establishing a good delivery condition), FINRA Rule 11581 closes the subsection with an equally brief single sentence — but one that, rather than establishing a substantive condition, simply directs the reader to where the substantive content (the forms themselves) can be found.

Connection to FINRA Rules 11100, 11130, 11210, 11360, 11550, 11571, 11574, and 11580

FINRA Rule 11581 connects to FINRA Rule 11100 — citing in its own text Notice 96-14, which is one of that rule's selected notices, with this dictionary's examination of FINRA Rule 11581 now substantiating that Notice 96-14 was a substantial 1996 publication addressing multiple Uniform Practice Code matters including both FINRA Rule 11100 refinements and the limited partnership transfer forms FINRA Rule 11581 references. It connects to FINRA Rule 11130's Supplementary Material .01, FINRA Rule 11210's Uniform Comparison Form, FINRA Rule 11360's Uniform Delivery Ticket Form, and FINRA Rule 11550's Uniform Transfer Instruction Form — as points of structural contrast, each of those provisions reproducing its standardized form directly within FINRA Rulebook Supplementary Material, while FINRA Rule 11581 instead cites an external 1996 Notice to Members publication. It connects to FINRA Rule 11571 and FINRA Rule 11574 — whose Supplementary Material .01 sample forms (the Sample Certificate and Authorizing Resolution/Certificate of Incumbency, and the Sample Limited Partnership Change of Trustee Form respectively) provide this dictionary's closest available preview of the kind of form content that the fuller set of limited partnership transfer forms in Notice 96-14, pages 70-75, likely encompasses. And it connects directly and indispensably to FINRA Rule 11580 — the rule immediately preceding it, whose paragraph (a) standard transfer forms mandate FINRA Rule 11581 exists solely to identify the location of.

How FINRA Rule 11581 Works With FINRA Rule 11580(a)

FINRA Rule 11580(a) requires each member that participates in the transfer of limited partnership securities, as defined in FINRA Rule 2310, to use standard transfer forms "in the same form as set forth in Rule 11581". FINRA Rule 11581 in turn states that the forms required by Rule 11580 are published in NASD Notice to Members 96-14 (March 1996), pp. 70–75. Read together, the two rules make the forms printed on those pages the standard that a member's transfer documents must match.

The two rules divide the work between them. FINRA Rule 11580 says who must use the forms, which securities they are used for, which securities are excluded, and how a member may obtain permission to modify the forms. FINRA Rule 11581 says where the forms are published. It names no member, no category of security, no exclusion and no exemption of its own.

Worked Scenario: A Sponsor's Own Transfer Document

Crestline Securities is to deliver, and Meridian Capital is to receive, interests in an unlisted real estate limited partnership. The interests are not traded on a national securities exchange and are not on deposit in a registered securities depository, so neither exclusion in FINRA Rule 11580(a) applies. The partnership's sponsor sends both members a transfer document of its own design and says that it collects the same information as the standard forms.

The sponsor's assurance does not settle the matter. FINRA Rule 11580(a) requires each participating member to use standard transfer forms in the same form as set forth in FINRA Rule 11581, and FINRA Rule 11581 identifies those forms as the ones published at pages 70 to 75 of Notice to Members 96-14. The obligation is placed on each member that participates in the transfer, not on the sponsor, and a document that departs from the published forms does not meet it, whoever drafted it. The only route to using a different form that the two rules provide is FINRA Rule 11580(b). Under it, the Corporate Financing Department may, pursuant to a written request for good cause shown, grant an exemption permitting a member to modify the standard transfer forms where necessary to meet other legal or regulatory requirements or to otherwise facilitate the transfer of the securities.

When the Forms Are Called For: Scope Comes From FINRA Rule 11580

FINRA Rule 11581 speaks of "the forms required by Rule 11580". Whether a particular transfer calls for those forms is therefore decided under FINRA Rule 11580(a). That paragraph does not apply to limited partnership securities that are traded on a national securities exchange, or that are on deposit in a registered securities depository and settle regular way. FINRA Rule 11581 does not repeat either exclusion. It does not need to, because it locates only the forms that FINRA Rule 11580 requires.

Suppose a member's operations manual says only "Limited partnership transfers: use the forms identified in FINRA Rule 11581", and staff prepare those forms for a transfer of limited partnership units that are traded on a national securities exchange. The forms are not required for that transfer. The units fall within the first exclusion of FINRA Rule 11580(a), and that exclusion turns on the units being exchange-traded. It does not depend on whether they are on deposit or how the trade settles.

The second exclusion has two conditions, and both must be met. Units that are on deposit in a registered securities depository but are sold for "seller's option" settlement do not settle regular way. Under FINRA Rule 11320, a regular way transaction is delivered on, but not before, the first business day following the date of the transaction. A seller's option transaction is delivered on the date the option expires, or earlier on written notice of intention to deliver. So the forms are required for such a transfer, unless the units are exchange-traded.

The exchange exclusion is framed in the present tense: securities "that are traded on a national securities exchange". Consider units that were once listed but have since been delisted, are now quoted only in the over-the-counter market, and are not on deposit in any registered securities depository. They are no longer traded on a national securities exchange, and neither exclusion describes them, so a member participating in their transfer uses the forms.

Which Securities: The FINRA Rule 2310 Definitions Behind the Forms

FINRA Rule 11580(a) reaches "limited partnership securities, as defined in Rule 2310". Under FINRA Rule 2310, a limited partnership is an unincorporated association that is a direct participation program organized as a limited partnership whose partners are one or more general partners and one or more limited partners, and which conforms to the Revised Uniform Limited Partnership Act or the applicable statute that regulates the organization of the partnership. Two things must therefore be true before the forms FINRA Rule 11581 locates come into play. The program must be a direct participation program, and it must be organized as a limited partnership.

The first requirement turns on tax treatment. FINRA Rule 2310 defines a direct participation program as a program that provides for flow-through tax consequences, regardless of the structure of the legal entity or vehicle for distribution. It then excludes, among other things, real estate investment trusts and any company registered pursuant to the Investment Company Act. Suppose a partnership is organized under a state limited partnership statute, but its income and losses do not flow through to its partners for tax purposes. It does not provide flow-through tax consequences, so it is not a direct participation program, and it is therefore not a limited partnership in FINRA Rule 2310's sense. The same result follows for a fund organized as a limited partnership that is registered under the Investment Company Act, because that category is excluded from the direct participation program definition by name.

The second requirement turns on the form of organization. A program organized as a limited liability company, with members and a manager rather than general and limited partners, can be a direct participation program, because the definition looks to flow-through tax consequences regardless of the structure of the legal entity. But it is not organized as a limited partnership. So its units are not limited partnership securities as FINRA Rule 2310 defines them, and FINRA Rule 11580(a) does not require the standard transfer forms for them.

Common Errors in Using the Limited Partnership Transfer Forms

Treating a substitute document as compliant because it gathers the same information. FINRA Rule 11580(a) requires the forms to be used in the same form as set forth in FINRA Rule 11581, and a departure needs an exemption under FINRA Rule 11580(b).

Reading FINRA Rule 11581's silence as extending the forms to every limited partnership interest. FINRA Rule 11581 locates only the forms that FINRA Rule 11580 requires, and FINRA Rule 11580(a) excludes exchange-traded securities and deposited securities that settle regular way.

Treating any partnership-like program as a limited partnership. The definition in FINRA Rule 2310 requires a direct participation program organized as a limited partnership.

Looking for the forms in the rule's selected notice. FINRA Rule 11581's selected notice is Regulatory Notice 10-49, titled "SEC Approval and Effective Date for New Consolidated FINRA Rules". The forms are in the notice that the rule's own text cites.

Programs in Any Industry, and Programs Made Up of Several Entities

The forms that FINRA Rule 11581 locates are used for limited partnership securities as FINRA Rule 2310 defines them, and that definition rests on the definition of a direct participation program. FINRA Rule 2310 lists oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities and Subchapter S corporate offerings, and then adds all other programs of a similar nature, regardless of the industry represented by the program. The industry a program works in therefore does not decide whether it is a direct participation program. What the definition looks to is whether the program provides for flow-through tax consequences, subject to the exclusions it lists.

Suppose a cattle-feeding program is organized under a state limited partnership statute, with a general partner and limited partners, and its income and losses flow through to its partners. Its units are not traded on a national securities exchange and are not on deposit in a registered securities depository. It is a direct participation program, and it is organized as a limited partnership, so its units are limited partnership securities. A member that participates in a transfer of those units uses the standard transfer forms, exactly as it would for a real estate partnership.

A program can also be made up of more than one entity. FINRA Rule 2310 provides that a program may be composed of one or more legal entities or programs, and that the term then means each of the separate entities or programs making up the overall program and/or the overall program itself. Suppose a sponsor runs a real estate program made up of three separate limited partnerships, each with its own general partner and limited partners and each providing flow-through tax consequences. Each of the three is itself a direct participation program organized as a limited partnership. So a transfer of interests in any one of them calls for the standard transfer forms, unless the interests are traded on a national securities exchange, or are on deposit in a registered securities depository and settle regular way. It does not matter that the interests are in one part of a larger program rather than in the program as a whole.

The Excluded Categories Name Kinds of Program, Not Kinds of Holder

FINRA Rule 2310 excludes from the direct participation program definition real estate investment trusts, tax qualified pension and profit sharing plans under Sections 401 and 403(a) of the Internal Revenue Code, individual retirement plans under Section 408 of that Code, tax sheltered annuities under Section 403(b), and any company, including separate accounts, registered pursuant to the Investment Company Act. Each category names a kind of program or vehicle that is excluded. None is framed in terms of who holds a program's interests.

Suppose a customer's individual retirement account holds units of an unlisted real estate limited partnership that provides flow-through tax consequences, and the units are not on deposit in any registered securities depository. The exclusion takes the individual retirement plan itself out of the definition. It says nothing that takes out the partnership in which the plan has invested. That partnership is still a direct participation program organized as a limited partnership, so a member that participates in a transfer of the units uses the standard transfer forms, although the seller is a retirement account.

The position is different where the program itself falls within an excluded category. A fund organized as a limited partnership, with a general partner and limited partners, that is registered under the Investment Company Act is a company registered pursuant to that Act. It is excluded from the direct participation program definition by name, so it is not a limited partnership in FINRA Rule 2310's sense, and FINRA Rule 11580(a) does not require the standard transfer forms for its interests.

One Class Listed, Another Not

The exchange exclusion in FINRA Rule 11580(a) describes the securities being transferred: limited partnership securities that are traded on a national securities exchange. Suppose a partnership that is a direct participation program organized as a limited partnership has common units traded on a national securities exchange, but it has also issued a separate class of units that is not listed or traded on any exchange and is not on deposit in any registered securities depository. Two members transfer some of the unlisted class. Those units are not traded on a national securities exchange, and they are not on deposit, so neither exclusion describes them. The members use the standard transfer forms for that transfer, even though the partnership's other class trades on an exchange.

Who Participates, and What a Paragraph (b) Exemption Permits

FINRA Rule 11580(a) places the obligation on each member that participates in the transfer of limited partnership securities. The paragraph draws no distinction by the capacity in which a member participates, and does not limit the obligation to members acting for their own account. Suppose a member, acting as agent for a customer, sells the customer's unlisted limited partnership units, which are not on deposit, to another member. The agent member participates in the transfer, so the obligation to use the standard transfer forms applies to it as well as to the other member.

FINRA Rule 11580(b) allows the Corporate Financing Department, pursuant to a written request for good cause shown, to grant an exemption from the requirements of paragraph (a). The exemption it describes is one that permits a member to modify the standard transfer forms. Suppose a member obtains an exemption permitting it to add an item to the standard transfer forms that another legal requirement makes necessary for one partnership's transfers. The exemption permits a modified version of the standard forms. The text describes an exemption to modify the forms, not one that removes that partnership's units from FINRA Rule 11580(a) altogether or lets the member use a document of its own choosing in place of the forms.

The Same Exchange Line in FINRA Rule 2310's Sales-Practice Provisions

FINRA Rule 11580(a) is not the only rule that treats exchange-traded partnership interests differently. FINRA Rule 2310's suitability provisions draw a similar line. Under FINRA Rule 2310(b)(2)(B), a member recommending to a participant the purchase, sale or exchange of an interest in a direct participation program must, among other things, have reasonable grounds to believe that the participant is or will be in a financial position appropriate to realize to a significant extent the benefits described in the prospectus, has a fair market net worth sufficient to sustain the risks inherent in the program, and that the program is otherwise suitable for the participant. Under FINRA Rule 2310(b)(2)(D)(i), that subparagraph does not apply to a secondary market transaction in an interest in a direct participation program that is listed on a national securities exchange.

Suppose a member recommends that a customer buy, from another member, units of an unlisted limited partnership that are not on deposit in any registered securities depository. Neither carve-out in FINRA Rule 2310(b)(2)(D) describes this transaction: the first reaches interests listed on a national securities exchange, and the second reaches an initial public offering of interests whose application for listing on a national securities exchange has been approved. So the carve-out does not lift the suitability requirements of FINRA Rule 2310(b)(2)(B) from the member's recommendation. And because the units are neither exchange-traded nor on deposit, each member participating in the transfer also uses the standard transfer forms under FINRA Rule 11580(a).

The carve-out is narrower for discretionary accounts. FINRA Rule 2310(b)(2)(C) provides that no member shall execute any transaction in a direct participation program in a discretionary account without prior written approval of the transaction by the customer. The listed-interest carve-out lifts that requirement only where the member is not affiliated with the direct participation program. Suppose a member that is affiliated with a program buys the program's exchange-traded limited partnership units in the secondary market for a customer's discretionary account. The standard transfer forms are not required, because the units are traded on a national securities exchange. But the member still needs the customer's prior written approval of the transaction, because it is affiliated with the program.

Before a Purchase Is Executed: The Liquidity Disclosure in FINRA Rule 2310(b)(3)(D)

A member that buys limited partnership units for a customer can have a disclosure duty under FINRA Rule 2310 as well as the duty to use the transfer forms. Under FINRA Rule 2310(b)(3)(D), prior to executing a purchase transaction in a direct participation program or a REIT, a member or person associated with a member must inform the prospective participant of all pertinent facts relating to the liquidity and marketability of the program or REIT during the term of the investment. The words of the subparagraph tie the duty to executing a purchase transaction. They do not mention a recommendation.

The subparagraph does not apply to an initial or secondary public offering of, or a secondary market transaction in, an interest in a direct participation program that meets the criteria in FINRA Rule 2310(b)(2)(D)(i) or (ii). Those criteria describe an interest listed on a national securities exchange, and an initial public offering of an interest whose application for listing on a national securities exchange has been approved by the exchange and whose applicant makes a good faith representation that it believes the listing will occur within a reasonable period of time following the formation of the program.

Suppose a customer, with no recommendation from its member, asks the member to buy units of an unlisted real estate limited partnership that provides flow-through tax consequences. The units are being sold through another member, are not listed on any exchange and are not on deposit in any registered securities depository. The purchase is a purchase transaction in a direct participation program, and it meets neither criterion in FINRA Rule 2310(b)(2)(D). So before executing it, the customer's member must inform the customer of the pertinent facts on the program's liquidity and marketability, although it recommended nothing. And because the units are neither traded on a national securities exchange nor on deposit, each member participating in the transfer uses the standard transfer forms that FINRA Rule 11581 locates.

The disclosure must come before execution. Suppose a member executes a customer's purchase of such units on a Monday, and first sends the customer a statement of the program's liquidity and marketability with the confirmation on the Tuesday. The information was given after the purchase transaction was executed, not prior to executing it, so it does not meet FINRA Rule 2310(b)(3)(D).

The pertinent facts include the sponsor's record. They include information regarding whether the sponsor has offered prior programs or REITs in which the offering materials disclosed a date or time period at which the program or REIT might be liquidated, and whether those prior programs or REITs in fact liquidated on or around that date or during that time period. Suppose the sponsor of the partnership whose units a customer is buying ran an earlier partnership whose offering materials disclosed that it might be liquidated seven to ten years after its offering, and twelve years after the offering that partnership had still not liquidated. Before executing the purchase, the member must tell the customer that the sponsor offered the earlier partnership with that disclosed liquidation period, and that the earlier partnership did not in fact liquidate during it.

Where the Liquidity Disclosure and the Transfer Forms Part Company

The disclosure and the transfer forms do not reach the same securities. FINRA Rule 2310 applies the disclosure to a REIT, which it defines by reference to FINRA Rule 2231(d)(4): the publicly issued equity securities of a real estate investment trust as defined in Section 856 of the Internal Revenue Code, not including securities listed on a national securities exchange. The transfer forms, by contrast, follow FINRA Rule 2310's definition of a limited partnership, which is a direct participation program organized as a limited partnership, and the direct participation program definition excludes real estate investment trusts.

Suppose a customer buys publicly issued shares of a real estate investment trust that are not listed on any national securities exchange and are not on deposit in any registered securities depository. Before executing the purchase, the member must inform the customer of the pertinent facts on the REIT's liquidity and marketability. The standard transfer forms are not required for the transfer. A real estate investment trust is excluded from the direct participation program definition, so its shares are not limited partnership securities as FINRA Rule 2310 defines them.

The listed-interest carve-out from the disclosure does not depend on who the member is. FINRA Rule 2310(b)(2)(D) makes a member's affiliation with the program matter only for subparagraph (C), the prior written approval needed for a transaction in a discretionary account. The criteria in FINRA Rule 2310(b)(2)(D)(i), to which FINRA Rule 2310(b)(3)(D) refers, describe the interest and the transaction: a secondary market transaction in an interest listed on a national securities exchange. Suppose a member affiliated with a program executes, for a customer's account that is not a discretionary account, a secondary market purchase of the program's limited partnership units, which are listed and traded on a national securities exchange. The transaction meets the criteria in FINRA Rule 2310(b)(2)(D)(i), so the liquidity and marketability disclosure is not required, although the member is affiliated with the program. The standard transfer forms are not required either, because the units are traded on a national securities exchange.

The Initial Public Offering Carve-Out Has Two Conditions

FINRA Rule 2310(b)(2)(D)(ii) lifts the suitability provisions of subparagraphs (A) and (B) for an initial public offering of a unit, depositary receipt or other interest in a direct participation program for which an application for listing on a national securities exchange has been approved by such exchange and the applicant makes a good faith representation that it believes such listing on an exchange will occur within a reasonable period of time following the formation of the program. The two conditions are joined by "and", so both must be met.

Suppose a limited partnership program makes an initial public offering of its units. The exchange has approved its application for listing, but the applicant makes no representation that it believes the listing will occur within a reasonable period of time following the formation of the program. The offering does not meet the criteria in FINRA Rule 2310(b)(2)(D)(ii). So a member recommending a purchase of the units in the offering must have the reasonable grounds FINRA Rule 2310(b)(2)(B) requires, and FINRA Rule 2310(b)(2)(A) still bars a member from participating in the offering unless the program has established suitability standards for participants that are fully disclosed in the prospectus and consistent with FINRA Rule 2310(b)(2)(B). An application that has been filed with an exchange but not yet approved does not meet the first condition either.

Recommending That a Customer Sell

FINRA Rule 2310(b)(2)(B) applies in recommending to a participant the purchase, sale or exchange of an interest in a direct participation program, and FINRA Rule 2310 defines a participant as the purchaser of an interest in a direct participation program. Suppose a member recommends that a customer, who some years earlier bought units of an unlisted limited partnership that provides flow-through tax consequences, sell them to a buyer represented by another member. The units are not listed on any exchange and are not on deposit in any registered securities depository. The recommendation is a recommendation to a participant of the sale of an interest in a direct participation program, and neither carve-out in FINRA Rule 2310(b)(2)(D) describes it. So the member must have the reasonable grounds FINRA Rule 2310(b)(2)(B) requires before recommending the sale, just as it would before recommending a purchase. The transfer of the units, when it happens, uses the standard transfer forms.

A General Partner That Is Itself a Company

FINRA Rule 2310 defines a limited partnership as a direct participation program organized as a limited partnership whose partners are one or more general partners and one or more limited partners. The definition says nothing about what kind of person a general partner must be. FINRA Rule 2310 defines a person as any natural person, partnership, corporation, association or other legal entity, and it speaks of an affiliate of a member that acts or proposes to act as a general partner of a program.

Suppose a program providing flow-through tax consequences is organized under a state limited partnership statute, with a limited liability company as its sole general partner and individual investors as its limited partners. The program itself is organized as a limited partnership, with a general partner and limited partners. That its general partner is a limited liability company does not make the program a limited liability company. So its units are limited partnership securities, and a member participating in a transfer of units that are neither traded on a national securities exchange nor on deposit uses the standard transfer forms.

Examination Relevance and Key Takeaways

FINRA Rule 11581 is tested on the Series 7 and Series 24 examinations as the citation rule identifying the published source of the limited partnership transfer forms FINRA Rule 11580(a) mandates — the final rule of the FINRA Rule 11500 subsection, and structurally unique among this dictionary's examined standardized-form provisions for citing rather than reproducing its referenced forms.

The key points to retain are these: FINRA Rule 11581 consists of a single sentence stating that the forms required by FINRA Rule 11580 are published in NASD Notice to Members 96-14 (March 1996), at pages 70 through 75; unlike the other standardized forms examined in this dictionary's coverage of the Uniform Practice Code — the FINRA Rule 11130 Standard Forms, the FINRA Rule 11210 Uniform Comparison Form, the FINRA Rule 11360 Uniform Delivery Ticket Form, the FINRA Rule 11550 Uniform Transfer Instruction Form, and the FINRA Rule 11571 and FINRA Rule 11574 sample forms, all reproduced directly within FINRA Rulebook Supplementary Material — FINRA Rule 11581 reproduces no form content, instead directing members to the specific 1996 Notice to Members publication where the forms themselves are published; FINRA Rule 11581 cites in its text Notice 96-14, which FINRA Rule 11100 lists as a selected notice, confirming Notice 96-14's character as a substantial 1996 publication addressing multiple Uniform Practice Code matters; and the rule was adopted by SR-NASD-95-53 effective January 29, 1996 — the same adoption date as FINRA Rule 11580 — and amended by SR-FINRA-2010-030 effective December 15, 2010, with one selected notice, 10-49.