Quick Answer
A member firm vets every new product (and every material modification) through a documented new-product review committee before any rep recommends it. That committee record is the reasonable-basis prong of suitability. The unit then layers on variable contracts, the Investment Company Act of 1940 (ICA), Securities Exchange Act of 1934 (SEA) product definitions, Securities Act of 1933 exemptions, the Trust Indenture Act of 1939 (TIA), and the Membership Application Program.
The whole unit on one sheet: product approval, suitability, variable contracts, funds, statutory definitions, exemptions, indentures, and membership scope.
New Product Due Diligence and Suitability
- New-product review committee must reach a documented approve, disapprove, or table decision before any rep recommends a new product; a material modification (payoff formula, embedded derivatives, fees, eligible-investor class) triggers the same review, a cosmetic prospectus update does not.
- Committee documents mechanics, risks, appropriate-account profiles, issuer due diligence, conflicts, and operational capacity; a blank or boilerplate entry is itself a red flag.
- Complex products (structured notes, leveraged and inverse exchange-traded funds (ETFs), reverse convertibles) get product-by-product approval (not category approval), enhanced due diligence, and rep training.
- Suitability has three components: reasonable-basis (firm understands the product, fits at least some investors), customer-specific (matches the particular customer's profile), and quantitative (a series of trades is not excessive).
- Reasonable-basis = firm/product prong (the committee record); customer-specific = rep-training prong; quantitative = firm-surveillance prong (turnover, cost-equity ratio, in-and-out trading).
Variable Contracts and Investment Companies
- Variable contracts (variable annuities, variable life) are BOTH securities and insurance products; compensation flows only through the member firm, never directly from the carrier.
- Deferred variable annuity rule: a registered principal reviews and approves or rejects in writing no later than 7 business days after the office of supervisory jurisdiction (OSJ) receives a complete and correct application, and before transmission to the carrier.
- ICA classifies investment companies into face-amount certificate companies, unit investment trusts (UITs), and management companies (open-end vs closed-end).
- A UIT has NO board of directors; the trustee administers a fixed portfolio.
- Forward pricing: buy or redeem at the next-computed net asset value (NAV); filling post-close orders at the same-day NAV is illegal late trading.
The One-Liners That Win Points
- A convertible bond is an equity security under the SEA (convertibility feature), not just a debt security.
- A warrant detachable from a bond is a stand-alone equity security.
- Commodity futures are NOT securities (Commodity Futures Trading Commission (CFTC) regulated); the "commonly known as a security" catch-all runs on the Howey investment-contract test.
- Industrial-revenue bonds may NOT qualify as municipal securities where a private corporate borrower is the real obligor.
- A 12b-1 fee above 0.25% disqualifies the "no-load" label even with no front-end or back-end load.
- Breakpoint sales just below a threshold (recommending $24,500 to dodge a $25,000 breakpoint) are the classic quantitative-suitability red flag; reps must disclose the letter of intent and rights of accumulation.
- A debt offering exempt from Securities Act registration is NOT automatically exempt from TIA qualification.
- A material change (new line of business) needs the continuing membership application filed and approved BEFORE the change is effected.
Numbers to Lock In
| Item | Value |
|---|---|
| Deferred-VA principal review deadline | 7 business days after complete OSJ package |
| 12b-1 distribution fee cap | 0.75% of average net assets |
| 12b-1 service fee cap | 0.25% |
| 12b-1 combined cap | 1.00% |
| "No-load" 12b-1 ceiling | 0.25% |
| Diversified fund test | 75-5-10 (75% compliant, 5% max one issuer, 10% max voting) |
| ICA 40% test (inadvertent investment company) | investment securities over 40% of total assets |
| Private-fund exclusion | 100 or fewer beneficial owners, or qualified-purchaser-only |
| Redemption suspension cap | 7 days (four narrow exceptions) |
| Regulation A Tier 1 | $20 million per 12 months |
| Regulation A Tier 2 | $75 million per 12 months |
| Tier 2 non-accredited cap | 10% of greater of income or net worth |
| Tier 1 affiliate resale cap | $6 million per 12 months |
| Reg D 506(b) non-accredited limit | up to 35 sophisticated (no solicitation) |
| Form D filing | within 15 days of first sale |
| Restricted-stock holding period | 6 months (reporting) / 1 year (non-reporting) |
| Affiliate volume limit (3 months) | greater of 1% outstanding OR 4-week avg weekly volume |
| Form 144 trigger | over 5,000 shares OR $50,000 in any 3 months |
| Qualified institutional buyer threshold | $100 million in securities |
| Trust Indenture Act threshold | corporate debt over $10 million (36-month rolling) |
| CMA ownership-change trigger | 25% or more, in the aggregate |
| CMA review targets | 75 days expedited / 180 days standard |
Top Gotchas
- The 7-business-day clock starts on the complete and correct package, not when the rep takes the order; the principal review must finish before transmission to the carrier.
- The deferred-VA rule covers deferred variable annuities only; variable life and immediate variable annuities fall under general suitability.
- The 75-5-10 test is a single integrated requirement applied to 75% of assets, not "75% diversified, 5% other, 10% other."
- Form 144 uses OR: over 5,000 shares OR $50,000 triggers it; either one alone is enough.
- The affiliate volume cap's 4-week-volume alternative requires an exchange listing; over-the-counter (OTC) securities use the 1% test only.
- Regulation A tiers are per 12 months, not per offering; the Tier 2 non-accredited cap does not apply to accredited investors or exchange-listed securities.
- A private placement to qualified institutional buyers does NOT trigger the TIA (not a public offering), but a public debt offering does even if Securities Act exempt.
- A new mutual fund within existing fund distribution is an internal new-product event, NOT a CMA trigger; first-time options or municipal underwriting IS a CMA trigger (new line of business).
One-Breath Recap
Every new product clears a documented committee (approve, disapprove, or table) before recommendation, and that record is reasonable-basis suitability, alongside customer-specific matching and quantitative surveillance for excessive activity. Variable-contract compensation flows only through the firm, deferred variable annuities get a 7-business-day principal review before transmission, and the Investment Company Act sets fund classes (UITs have no board), the 75-5-10 diversified test, 12b-1 caps, and forward pricing. Convertibles and warrants are equity securities, commodity futures are not securities, Regulation A runs $20 million and $75 million tiers, restricted-stock resales carry holding-period and volume limits, the Trust Indenture Act reaches public corporate debt above $10 million, and a new line of business needs a continuing membership application filed before the change is effected.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Product and Service Supervision unit for the complete lesson.