Table of Contents
SERIES 7 | SERIES 65 | FINANCIAL REGULATION COURSES
FINRA Rule 2310 — Direct Participation Programs — is the comprehensive rule governing the participation of FINRA member firms in the public offering and distribution of direct participation programs and unlisted real estate investment trusts, establishing specific suitability requirements that must be satisfied before any recommendation of these products to customers, imposing limits on organisation and offering expenses and underwriting compensation, restricting non-cash compensation arrangements in DPP and REIT distribution, requiring issuers to disclose per share estimated values in periodic reports, and restricting the compensation arrangements applicable to limited partnership rollup transactions — creating a protective regulatory framework specifically tailored to the unique risks, illiquidity, and complexity of these alternative investment vehicles whose characteristics differ fundamentally from the exchange-listed securities that most retail investors are most familiar with.
Direct participation programs — universally abbreviated DPPs — are investment vehicles structured as limited partnerships, limited liability companies, S-corporations, or other pass-through entities that allow investors to participate directly in the cash flows and tax consequences of the underlying business activities — typically real estate, oil and gas exploration and production, equipment leasing, or other asset-heavy business ventures — without the entity-level taxation that applies to corporations and without the liquidity of publicly traded securities. The flow-through tax treatment — with income, losses, deductions, and credits passing directly to investors' individual tax returns — is the defining economic characteristic that distinguishes DPPs from other investment structures and that historically made them particularly attractive to high-income investors seeking tax shelter benefits.
Non-traded real estate investment trusts — unlisted REITs whose shares are registered under the Securities Act of 1933 but are not listed on a national securities exchange — are treated equivalently to DPPs under most Rule 2310 provisions, sharing the defining characteristics of illiquidity and valuation opacity that make the rule's specific protective framework appropriate for both product categories.
Rule 2310 is tested on the Series 7 examination as the rule governing the most illiquid and complex category of investment product that General Securities Representatives are authorised to recommend — requiring thorough understanding of what DPPs are, why their suitability assessment requirements go beyond the general FINRA Rule 2111 framework, what specific expense and compensation limits apply, and what the non-cash compensation framework requires following the March 2026 amendments under FINRA Forward.
Rule 2310(a)(4) defines a direct participation program as a program which provides for flow-through tax consequences regardless of the legal form of the entity — encompassing the full range of pass-through investment structures that share the defining characteristic of tax consequences flowing directly to investors rather than being absorbed at the entity level.
The most common DPP structures include real estate limited partnerships — which invest in income-producing real estate or real estate development projects and allow investors to share in rental income, depreciation deductions, and any gains or losses on property dispositions. Oil and gas limited partnerships — which invest in the exploration, development, and production of petroleum resources — provide investors with depletion allowances and intangible drilling cost deductions that can generate significant tax benefits in addition to the economic returns from successful wells. Equipment leasing partnerships — which purchase and lease equipment to businesses — generate rental income and depreciation deductions that can shelter income from other sources.
Rule 2310 explicitly includes limited liability companies treated as partnerships for federal income tax purposes within the DPP definition — recognising that the LLC structure has largely replaced the traditional limited partnership form for many DPP offerings while preserving the same tax flow-through characteristics that define the category.
The General Partner — the managing entity responsible for making all investment decisions, managing the program's assets, and directing the program's operations — controls the DPP's activities and bears unlimited liability for the program's obligations. Limited partners — the investors who provide the capital — receive their proportionate share of income, losses, deductions, and credits in exchange for their investment but have no voice in day-to-day management decisions and bear liability only up to the amount of their invested capital.
Rule 2310(b)(2) establishes suitability requirements for DPP recommendations that are specifically tailored to the characteristics of these products — going beyond the general investment profile analysis required by FINRA Rule 2111 to address the specific features of DPPs that create distinct suitability considerations.
Before recommending a DPP to any customer a member firm and its associated persons must have reasonable grounds to believe — based on information provided by the customer — that the customer meets the financial suitability standards specified in the DPP's offering documents AND that the investment is otherwise suitable for the customer given their investment objectives, other investments, financial situation and needs, and tax status.
The financial suitability thresholds — specified in each DPP's prospectus or offering memorandum — typically require minimum net worth excluding home, furnishings, and automobiles of seventy-five thousand to one hundred thousand dollars, and minimum annual income of forty-five thousand to seventy-five thousand dollars. Some offerings require investors to meet either threshold — others require both simultaneously.
The dual suitability requirement reflects the two-dimensional nature of DPP suitability analysis. The financial thresholds address the investor's capacity to absorb a total loss — an outcome that is entirely possible given the illiquid and speculative nature of many DPP investments — without impairing their essential financial obligations and living standards. The overall suitability assessment addresses whether the DPP's risk profile, illiquidity, tax characteristics, investment timeline, and complexity are consistent with the specific customer's complete investment profile including their experience with alternative investments and their genuine understanding of the product's structure.
The member firm must maintain in its files documents disclosing the basis upon which the suitability determination was made — creating a documented record that can be reviewed by FINRA examiners and that provides evidence of compliance with the suitability obligation for each DPP recommendation made.
Rule 2310 imposes specific limits on the costs that may be charged to investors in connection with DPP offerings — protecting investors from excessive offering costs that consume an unreasonably large proportion of their investment before any funds are deployed for the stated business purpose.
Organisation and offering expenses — including legal fees, accounting costs, printing, registration fees, and all other costs of organising the program and conducting the offering — may not exceed fifteen percent of gross offering proceeds. This fifteen percent cap ensures that at least eighty-five cents of every dollar invested in a DPP is available for actual investment in the program's underlying assets — rather than being consumed by the administrative costs of bringing the offering to market.
Total underwriting compensation — all items of compensation from whatever source payable to underwriters, broker-dealers, and their affiliates in connection with the offering — may not exceed ten percent of gross offering proceeds. This ten percent cap on underwriting compensation is one of the most directly and most frequently tested Rule 2310 provisions on the Series 7 examination — establishing a specific numerical limit that constrains the selling compensation extractable from DPP investors and distinguishes the DPP underwriting compensation framework from the facts-and-circumstances fairness standard of FINRA Rule 5110 applicable to conventional equity and debt offerings.
The combined effect of the two caps — fifteen percent for organisation and offering expenses and ten percent for underwriting compensation — ensures that at least seventy-five cents of every dollar invested is available for stated investment purposes, with the remaining twenty-five cents representing the maximum that can be consumed by offering costs and selling compensation combined.
Under FINRA Rule 2310 and conforming amendments via Regulatory Notice 26-05, non-cash compensation arrangements — including gifts, sales incentives, and business entertainment items — are heavily restricted to prevent conflicts of interest in the distribution of DPP and unlisted REIT securities.
Associated persons may not accept any non-cash gifts relating to the sale of DPP or unlisted REIT securities exceeding three hundred dollars per person per year. This three hundred dollar limit was codified on March 30, 2026 — increasing the historical one hundred dollar threshold that had been in place since 1992 to reflect structural inflation and to align the DPP non-cash compensation standard with the gift limits simultaneously updated across the broader FINRA non-cash compensation framework.
The March 30, 2026 amendments were adopted as part of the FINRA Forward initiative — FINRA's comprehensive rulebook modernisation programme launched in April 2025 — and were implemented through Regulatory Notice 26-05 issued February 27, 2026 following SEC approval of the underlying rule change on February 12, 2026. The conforming amendments raised the gift limit to three hundred dollars simultaneously across five rules — FINRA Rule 3220 governing general gifts and gratuities, Rule 2310 governing DPPs, Rule 2320 governing variable contracts of an insurance company, Rule 2341 governing investment company securities, and Rule 5110 governing underwriting terms and arrangements — creating a unified and consistent gift limit framework across the entire FINRA non-cash compensation rulebook for the first time.
The three hundred dollar limit accounts for ongoing inflation at current levels for approximately ten years from the date of adoption — FINRA has stated its intention to review the gift limit periodically to determine if further adjustments are needed to reflect changing economic conditions, rather than allowing the limit to become economically unrealistic over another thirty-year period as the prior one hundred dollar limit had.
Wholesaling salaries — the compensation paid by DPP and REIT sponsors to their internal wholesaling staff who market programs to broker-dealer distribution networks — are excluded from the three hundred dollar cap and are not considered non-cash compensation for purposes of this framework. Standard training and education event reimbursements — payments covering a registered representative's attendance at genuine educational programmes that provide bona fide professional development value — are similarly excluded from the cap. Both excluded categories must however be transparently disclosed in the distribution arrangements section of the offering prospectus — ensuring that investors have complete visibility into the compensation flows associated with the program's distribution regardless of whether those flows are subject to the per-person annual cap.
The non-cash compensation restrictions of Rule 2310 work alongside the general Gifts Rule of FINRA Rule 3220 — which was itself amended to three hundred dollars effective March 30, 2026 — creating the unified gift limit framework that eliminates the prior inconsistency between the general gifts framework and the product-specific non-cash compensation rules and simplifies compliance for member firms operating across multiple product categories simultaneously.
Gifts must be valued at cost excluding tax and delivery charges — with one important exception. Tickets to sporting or entertainment events must be valued at the higher of cost or face value — preventing the undervaluation of premium event tickets whose face value may significantly exceed their actual cost to the giver.
One of the most investor-protective provisions of Rule 2310 — and one directly connected to the account statement disclosure requirements of NASD Rule 2340 — is the requirement that member firms may not participate in a DPP or unlisted REIT offering unless the issuer has agreed to disclose a per share estimated value of the program's securities in periodic reports filed with the SEC.
The per share estimated value requirement addresses one of the most fundamental investor protection concerns with DPPs and non-traded REITs — the valuation opacity that leaves investors without a market price reference for their holdings throughout the often extended period before any liquidity event occurs. Unlike exchange-listed securities whose market prices are continuously quoted and accessible through public trading data, investors in non-traded DPPs and REITs have no equivalent price reference — they know what they paid for their investment but have no ongoing indication of what it is currently worth.
The amendments implemented through Regulatory Notice 15-02 established two specific methodologies for calculating per share estimated values that are deemed to be developed in a manner reasonably designed to ensure reliability.
The net investment methodology calculates the per share estimated value based on the total net investment — the amount available for investment after deducting offering costs and organisation expenses from gross proceeds — divided by the total shares outstanding. This methodology produces a straightforward estimate of the per share value of the funds actually invested in the program's assets rather than the per share price paid by investors inclusive of offering costs and commissions.
The appraised value methodology calculates the per share estimated value based on valuations of the assets and liabilities of the DPP or REIT performed at least annually by or with the material assistance or confirmation of a third-party valuation expert or service — derived from a methodology conforming to standard industry practice — and accompanied by a written opinion or report explaining the scope of the review, the methodology used, and the basis for the values reported. The appraised value methodology provides investors with an expert-derived estimate of the program's current asset value that may be more representative of true economic value than the simpler net investment calculation.
Member firms that use the net investment methodology must provide enhanced disclosure to investors if any portion of the distributions paid represents a return of their capital investment — a practice called over-distribution that returns investors' own money disguised as investment income and that can mislead investors about the program's actual investment performance and the sustainability of its distribution rate.
Rule 2310 establishes specific restrictions on the compensation arrangements applicable to limited partnership rollup transactions — corporate restructurings in which the interests of limited partners in one or more existing partnerships are exchanged for securities of a new entity such as a corporation, REIT, or new limited partnership — protecting limited partners from compensation arrangements that create conflicts of interest between the financial interests of the member firm soliciting rollup votes and the interests of the limited partners whose votes are being solicited.
No member or associated person may participate in soliciting votes or tenders from limited partners in connection with a rollup transaction unless the compensation received is payable in equal amounts regardless of whether the limited partner votes affirmatively or negatively. This equal compensation requirement prevents the most direct form of compensation-driven conflict — where a broker-dealer receives higher compensation for each affirmative vote than for each negative vote, creating a powerful financial incentive to advocate for the rollup regardless of whether it is in the limited partners' best interests.
Additional rollup compensation restrictions prohibit transaction-based compensation structures that reward member firms for successfully completing rollup transactions through any mechanism that could compromise the objectivity of their advice to limited partners about whether to vote for or against the proposed restructuring.
Rule 2310's per share estimated value requirement connects directly to the customer account statement obligations of FINRA Rule 2231 — which requires member firms to include per share estimated values for DPPs and non-traded REITs on customer account statements using reliable methodologies.
A customer who holds DPP interests in their brokerage account will see the per share estimated value on their quarterly account statement — providing ongoing transparency about the estimated current worth of their illiquid investment that supplements the periodic disclosures in the issuer's SEC filings. The account statement valuation and the Rule 2310 issuer disclosure requirement together create a two-pronged transparency framework ensuring that DPP investors are never left entirely without a reference value for their holdings regardless of how extended the period between the initial investment and any eventual liquidity event.
FINRA Rule 2310 is tested on the Series 7 examination in the context of direct participation programs, suitability requirements, offering expense limits, underwriting compensation caps, non-cash compensation, and per share estimated value disclosure.
The key points to retain are these.
FINRA Rule 2310 — Direct Participation Programs — governs member firm participation in DPP and non-traded REIT offerings. DPPs are investment vehicles providing flow-through tax consequences to investors through limited partnerships, LLCs, or other pass-through structures — including real estate, oil and gas, and equipment leasing programs. Non-traded REITs are treated equivalently to DPPs under most Rule 2310 provisions. The General Partner manages operations — limited partners bear liability only to the extent of invested capital.
Suitability requirements exceed those of FINRA Rule 2111 — members must have reasonable grounds to believe the customer meets the financial thresholds specified in the offering documents AND that the investment is otherwise suitable — with suitability basis documentation maintained in the member's files. Organisation and offering expenses may not exceed fifteen percent of gross proceeds. Total underwriting compensation may not exceed ten percent of gross proceeds — a specific numerical limit directly tested on the Series 7 examination.
Non-cash compensation was amended effective March 30, 2026 via Regulatory Notice 26-05 under the FINRA Forward initiative — raising the per-person annual gift limit from one hundred dollars to three hundred dollars across Rules 2310, 2320, 2341, 5110, and Rule 3220 simultaneously. The three hundred dollar limit accounts for approximately ten years of future inflation. Gifts must be valued at cost — except event tickets which are valued at the higher of cost or face value. Wholesaling salaries and bona fide training and education reimbursements are excluded from the cap but must be disclosed in the prospectus distribution arrangements section.
Member firms may not participate in a DPP or non-traded REIT offering unless the issuer agrees to disclose per share estimated values in periodic SEC reports — using either the net investment methodology or the appraised value methodology — with enhanced disclosure of over-distributions required when the net investment methodology is used. Limited partnership rollup compensation must be equal regardless of vote direction — preventing compensation-driven conflicts in the rollup vote solicitation process.
