Quick Answer
A member firm vets every new product and material modification through a review committee before recommendation; that record is the reasonable-basis prong. The unit covers variable contracts, Investment Company Act of 1940 (ICA), Securities Exchange Act of 1934 (SEA), Securities Act of 1933 exemptions, Trust Indenture Act of 1939 (TIA), and Membership Application Program.
The unit on one sheet: product approval, suitability, variable contracts, funds, exemptions, membership.
New Product Due Diligence and Suitability
- New-product review committee must reach a documented approve, disapprove, or table decision before recommendation; material modification (payoff, derivatives, fees, investor class) triggers review; a cosmetic update doesn't.
- Committee documents mechanics, risks, account profiles, due diligence, conflicts, and capacity; a blank entry is a red flag.
- Complex products (structured notes, leveraged and inverse exchange-traded funds (ETFs), reverse convertibles) get product-by-product approval, not category, enhanced diligence and rep training.
- Suitability has three components: reasonable-basis (product understanding), customer-specific (matches the customer), and quantitative (trading not excessive).
- Reasonable-basis = firm/product prong; customer-specific = rep-training prong; quantitative = firm-surveillance prong (turnover, cost-equity ratio, in-and-out trading).
Variable Contracts and Investment Companies
- Variable contracts (annuities, life) are BOTH securities and insurance; pay generally flows through the member firm; a carrier may pay a rep directly only if the firm agrees, relies on SEC relief, treats it as firm compensation, and keeps records.
- Deferred variable annuity rule: a registered principal reviews, approves, or rejects in writing within 7 business days after the office of supervisory jurisdiction (OSJ) gets a complete, correct application, 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; the trustee runs a fixed portfolio.
- Forward pricing: buy/redeem at next-computed net asset value (NAV); filling post-close orders at same-day NAV is illegal late trading.
The One-Liners That Win Points
- A convertible bond is an equity security under SEA (convertibility feature), not a debt security.
- A warrant detachable from a bond is an equity security.
- Commodity futures are NOT securities (Commodity Futures Trading Commission regulated); "commonly known as a security" catch-all runs on Howey test.
- Industrial-revenue bonds may NOT qualify as municipal securities where a private corporate borrower is the obligor.
- A 12b-1 fee above 0.25% disqualifies the "no-load" label even with no front-end or back-end load.
- Breakpoint sales ($24,500 against a $25,000 breakpoint) are a breakpoint-rule issue, not quantitative suitability; reps check 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 continuing membership application filed and approved BEFORE change is effected.
Numbers to Lock In
| Item | Value |
|---|---|
| Deferred-VA review deadline | 7 business days after complete OSJ package |
| 12b-1 distribution fee cap | 0.75% of average net assets |
| Service fee cap | 0.25% |
| Combined cap | 1.00% |
| "No-load" ceiling | 0.25% |
| Diversified fund test | 75-5-10 (75% assets, 5% max one issuer, 10% max voting) |
| ICA 40% test | securities over 40% of total assets |
| Private-fund exclusion | 100 or fewer beneficial owners, or qualified-purchaser-only |
| Redemption suspension cap | 7 days (four exceptions) |
| Regulation A Tier 1 | $20 million per 12 months |
| 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 | 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 volume |
| Form 144 trigger | over 5,000 shares OR $50,000 in 3 months |
| Qualified institutional buyer threshold | $100 million in securities |
| CMA ownership-change trigger | 25%+ aggregate |
| CMA decision deadline | 30 days after interview, 45 days if none; 180-day failure backstop |
Top Gotchas
- The 7-business-day clock starts on the complete and correct package, not when rep takes the order.
- 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 three separate buckets.
- Form 144 uses OR: either threshold, 5,000 shares or $50,000, alone triggers it.
- Affiliate volume cap's 4-week-volume alternative requires an exchange listing; over-the-counter (OTC) securities use 1% test.
- Regulation A tiers are per 12 months, not per offering; Tier 2's non-accredited cap doesn't apply to accredited investors or exchange-listed securities.
- A private placement to qualified institutional buyers does NOT trigger the TIA; Securities Act-exempt public debt does unless a TIA exemption covers it.
- 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.
One-Breath Recap
Every new product clears a committee (approve, disapprove, table): reasonable-basis suitability, customer-specific matching, and quantitative surveillance. Variable-contract pay generally flows through the firm, with a narrow direct-payment exception; deferred variable annuities get a 7-business-day principal review before transmission. Investment Company Act sets fund classes (UITs, no board), the 75-5-10 test, 12b-1 caps, and forward pricing. Convertibles and warrants are equity securities; commodity futures are not. Regulation A runs $20 million and $75 million tiers; restricted stock carries holding-period, volume limits. The Trust Indenture Act governs public debt indentures; new business lines need a membership application filed first.
Need more than the recap? Read the full Product and Service Supervision unit.