This session will provide important guidance to attendees on the marketing risks that apply to DPP advertising and marketing materials and what FINRA’s expectations are in regard to such materials. In view of the heightened regulatory scrutiny in this area, this is a must-attend session for advisors and compliance officers alike. Attendees will be provided valuable insights about the following topics: • FINRA Rule 2210 overview • How Reg. D Rule 502C applies to seminars and advertising • How much disclosure is “fair” disclosure? • What regulators expect to see in terms of content • Looking for trouble? Practices advisors should avoid • Hands on case study reviews of problematic marketing materials Moderator: Brad Updike, Mick & Associates Panelists: Brett Evans, Hull, Evans, Kob LLP; Amy Knickerbocker, A3K Advertising; David Cohen, APX Energy

1. DPP Marketing:
What Are Your
Obligations?

2. Our Panelists
Bradford Updike, Mick & Associates
Brett Evans, Hull Evans & Kob LLP
David Cohen, APX Energy, LLC
Amy Knickerbocker, A3K Advertising, Inc.

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

4. 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)

5. 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

6. 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?????

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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)

13. 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

14. 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

15. 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

16. 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)

17. 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

18. 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

19. Filing Requirements-Rule 2210(c)
All advertising for new B/D for one year
Public DPPs

20. 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

21. 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

22. 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

23. Cases Studies

24. 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