7.3 DPP Suitability and Risks
Key Takeaways
- FINRA Rule 2310 sets suitability standards for DPPs.
- Suitable investors are high net worth, long-term, and tax sensitive.
- Liquidity risk is the most significant DPP risk.
- Recourse debt increases investor liability and basis.
- Liquidation priority favors creditors before partners.
Last updated: January 2026
DPPs are complex, illiquid investments suitable only for certain investors. FINRA Rule 2310 governs DPP suitability requirements.
FINRA Rule 2310
This rule establishes suitability standards for DPP recommendations:
Key Requirements
- Must have reasonable grounds to believe the investment is suitable
- Must consider customer's financial situation and needs
- Must disclose all material facts about the investment
- Must ensure customer can bear the economic risk
Suitable Investor Profile
DPPs are generally suitable for investors who:
| Characteristic | Requirement |
|---|---|
| Net worth | High net worth (often $1 million+) |
| Tax bracket | High marginal tax bracket (37%+) |
| Investment horizon | Long-term (7-10+ years) |
| Liquidity needs | Low need for liquidity |
| Risk tolerance | High risk tolerance |
| Diversification | Already have diversified portfolio |
| Sophistication | Understand complex investments |
NOT Suitable For
- Investors needing liquidity
- Low-tax-bracket investors
- Conservative/risk-averse investors
- Investors with short time horizons
- Unsophisticated investors
Key Risks of DPPs
1. Liquidity Risk (MOST SIGNIFICANT)
- No secondary market for LP interests
- Cannot easily sell or transfer units
- Investment locked up for years
- May have to sell at significant discount
2. Business/Economic Risk
- Underlying business may fail
- Real estate values may decline
- Oil wells may be dry
- Equipment may become obsolete
3. Legislative/Tax Risk
- Tax laws may change
- Deductions may be disallowed
- Tax benefits may be reduced or eliminated
4. Management Risk
- General partner may make poor decisions
- Conflicts of interest
- Excessive fees
5. Leverage Risk
- Recourse vs. non-recourse debt
- Recourse debt increases limited partner liability
- Non-recourse debt only secured by partnership assets
Recourse vs. Non-Recourse Debt
Recourse Debt
- Lender can pursue both partnership assets AND partners personally
- Limited partner's at-risk amount includes their share of recourse debt
- Increases tax basis (more deductions available)
Non-Recourse Debt
- Lender can only pursue partnership assets
- Does NOT add to limited partner's at-risk amount (except real estate)
- Real estate exception: Non-recourse debt included in basis
Liquidation Priority
When a limited partnership is dissolved, proceeds are distributed in this order:
| Priority | Recipient |
|---|---|
| 1st | Secured creditors |
| 2nd | General (unsecured) creditors |
| 3rd | Limited partners (return of capital, then profits) |
| 4th | General partners |
Memory Aid: "Secured, General creditors, Limited partners, General partners" = SGLG
Exam Tip: Liquidation Order Limited partners get paid before general partners but after ALL creditors. General partners are last because they have unlimited liability for partnership debts.