What Is a Master Limited Partnership?
A master limited partnership (MLP) is a publicly traded limited partnership that combines partnership tax benefits with exchange-traded liquidity, and is typically sold by brokers and financial advisors to retail investors seeking high-yield income from the energy sector.
Most MLPs operate energy infrastructure—pipelines, storage terminals, processing plants, and gathering systems for oil, natural gas, and natural gas liquids. Major issuers include Enterprise Products Partners, Energy Transfer, MPLX, Plains All American Pipeline, and Western Midstream Partners. An MLP has two classes of partners: the general partner (GP) manages operations and typically holds a 2% stake, while the limited partners (LPs) provide capital but have no management control.
The GP is usually a subsidiary of a large energy corporation that appoints the GP’s board, creating inherent conflicts between the sponsor’s interests and those of public unitholders. MLPs pay quarterly distributions funded by distributable cash flow. Approximately 80–90% of distributions are classified as tax-deferred return of capital, reducing the investor’s cost basis. The MLP universe has contracted from roughly 120 partnerships worth $800 billion at its 2014 peak to fewer than 40 today.
What Are the Hidden Risks of Energy MLPs?
Energy MLPs expose investors to commodity price risk, distribution cuts, governance conflicts, and concentration in a single volatile sector—risks that brokers routinely minimize when marketing these products as stable “toll-road” investments.
Despite being presented as insulated from commodity prices, the correlation between oil prices and MLP returns spiked from 32% before 2014 to over 50% afterward. When oil collapsed in 2014–2016, the Alerian MLP Index fell approximately 38% in 2015 while the S&P 500 declined less than 1%. The COVID-19 crash drove the largest MLP ETF down over 32% in 2020.
Distribution cuts are the most direct source of harm. Kinder Morgan slashed its distribution by 75% in December 2015, weeks after management reaffirmed growth guidance; the stock fell 65% that year. Plains All American Pipeline has been cut three times since 2016. Energy Transfer cut by 50% in 2020. MLPs also carry leverage of 4–5x debt-to-EBITDA and historically distributed nearly 100% of cash flow, funding growth entirely through external financing—a model that collapsed when capital markets froze.
How Do MLP Tax Complications Harm Investors?
MLP tax reporting is substantially more complex than standard securities, creating costs and risks that brokers rarely disclose at the point of sale.
Unitholders receive Schedule K-1 forms instead of 1099s, often arriving late and detailing income across multiple states. An investor holding a single MLP operating in 15 states may need to file 15 separate state returns. Most tax software cannot handle K-1 reporting, forcing investors to hire professionals at additional cost.
Holding MLPs in an IRA triggers unrelated business taxable income (UBTI). If UBTI exceeds $1,000 per year, the IRA must file Form 990-T and pay tax at the highest trust rate—currently 37%. The custodian pays taxes directly from account assets, potentially liquidating holdings without investor input. The tax advantages that make MLPs attractive are entirely wasted inside a tax-deferred account, while the UBTI liability creates a new cost. A separate risk arises if an MLP restructures debt: limited partners can face “phantom income” taxes exceeding the value of their remaining investment.
Why Do Brokers Recommend MLPs Despite the Risks?
Brokers recommend MLPs because the products generate higher compensation than comparable investments. Non-traded MLP offerings historically carried upfront selling commissions of 7%, plus 3–4% in additional fees—meaning investors lost 10–11% of principal before the investment generated any return.
A structural conflict exists between the GP and limited partners. The GP controls the board, sets distribution policy, and executes “dropdown” transactions where pricing is inherently conflicted. The SEC warns that MLPs can opt for a lower standard of care than the fiduciary standard owed to corporate shareholders. Incentive distribution rights (IDRs) escalated the GP’s share to as high as 50% of incremental cash flow, incentivizing leverage-fueled growth over disciplined capital allocation.
FINRA has identified failure to supervise as a central problem when firms do not review energy product recommendations against customer profiles, including risk tolerance, timeline, and concentration levels.
Are MLPs Suitable for Retirement Accounts?
MLPs are unsuitable for most retirement accounts because they expose investors to concentrated energy-sector risk, complex tax obligations, and UBTI liability that directly erodes retirement savings.
FINRA Rule 2111 and SEC Regulation Best Interest (Reg BI) require brokers to consider reasonably available alternatives. For a retiree seeking income, a diversified bond portfolio or income ETF achieves that objective without the commodity exposure, K-1 complexity, or distribution-cut risk of an MLP.
Despite these requirements, enforcement actions reveal a pattern of MLPs being sold to elderly investors who did not understand the risks. FINRA’s 2026 Annual Regulatory Oversight Report identifies overconcentration and Reg BI care obligation violations as enforcement priorities.
What Happened When MLPs Converted to Corporations?
Between 2014 and 2019, major MLPs including Kinder Morgan, Williams Companies, ONEOK, Targa Resources, and Dominion Energy Midstream converted from partnerships to corporations. By mid-2019, nine of the 20 largest midstream stocks had completed conversions—driven by the GP’s desire to simplify governance and attract institutional capital.
The tax impact was severe. Because distributions reduce cost basis over time, long-term holders often had near-zero adjusted bases. Upon conversion, the full difference was taxable—even in all-stock transactions where investors received no cash. A portion was taxed at ordinary income rates due to depreciation recapture. FERC’s March 2018 decision to eliminate the income tax allowance for MLP pipelines accelerated the trend; MLP prices dropped approximately 10% on the announcement date alone.
What Are the Risks of MLP Funds and ETFs?
MLP closed-end funds, ETFs, and ETNs add layers of risk beyond the underlying MLPs. Closed-end funds commonly employ leverage of 25–40%. During the March 2020 crash, Tortoise Energy Infrastructure Fund fell 92% at its low; Goldman Sachs MLP and Energy Renaissance Fund lost 70% and executed a 9-for-1 reverse split; Kayne Anderson declined approximately 70%. Multiple MLP funds were liquidated entirely.
MLP ETFs structured as C-corporations (such as AMLP, the largest at approximately $11.8 billion) face a persistent tax drag of roughly 2.4% annually. Over the decade ending December 2025, AMLP returned 8.04% annualized versus 12.5% for a RIC-compliant alternative. MLP ETNs carry issuer credit risk as unsecured bank debt—the Credit Suisse collapse in March 2023 demonstrated this danger. Over 130 MLP fund products have launched since 2004; only a fraction survive.
Recent MLP Fraud Cases and Enforcement Actions
GPB Capital Holdings — $1.8 Billion LP Fraud (2021–2025). The SEC, DOJ, and seven state regulators charged GPB Capital with defrauding approximately 17,000 investors through limited partnership offerings operating a Ponzi-like scheme. CEO David Gentile received seven years in prison; Jeffry Schneider received six years. A court approved $400 million for distribution to harmed investors.
Energy Transfer LP — $15 Million Class Action Settlement (2025). Pension fund investors settled claims against Energy Transfer for false statements about pipeline project prospects and regulatory compliance. Final approval was granted in October 2025.
Boardwalk Pipeline Partners — $690 Million Governance Litigation (2018–2022). Limited partners challenged the GP’s forced buyout after a FERC policy change. The Court of Chancery awarded $690 million; the Delaware Supreme Court reversed in 2022, finding the GP acted in “good faith”—underscoring the limited protections available to MLP unitholders.
FINRA Disciplinary Action — Unsuitable LP Sale to 92-Year-Old (2025). FINRA sanctioned a broker for recommending a $60,000 illiquid limited partnership to a 92-year-old retiree with moderate risk tolerance, reflecting ongoing regulatory focus on protecting seniors from unsuitable complex products.
What Should You Do If You Lost Money on MLPs?
Investors who suffered MLP losses may have legal claims against the broker and firm that recommended the investment. Most brokerage agreements require FINRA arbitration rather than court—but investors can and do recover substantial amounts through this process.
Common legal bases include unsuitable recommendation, misrepresentation or omission of material risks, breach of fiduciary duty, failure to supervise, and negligence. Time limits apply—FINRA’s eligibility rule requires claims within six years of the event. If you believe your broker recommended unsuitable MLPs, consult a securities attorney promptly.
Talk to an Investment Fraud Attorney About Your MLP Losses
If you lost money on master limited partnerships, MLP funds, or MLP-related products due to a broker’s unsuitable recommendation, misrepresentation, or failure to disclose material risks, you may have a viable claim to recover those losses.
Attorney Robert Wayne Pearce has over 45 years of experience representing investors in FINRA arbitration and securities litigation. Under his leadership, the Law Offices of Robert Wayne Pearce, P.A. has recovered more than $185 million for clients nationwide in cases involving energy investments, broker misconduct, and overconcentrated portfolios.
Call (800) 732-2889 today for a free consultation. There is no cost to discuss your situation and determine whether you have a claim worth pursuing. The sooner you act, the stronger your position—time limits on filing FINRA arbitration claims can work against investors who delay.
Frequently Asked Questions About Master Limited Partnerships
Are MLP Distributions Guaranteed?
No. MLP distributions are not guaranteed and can be reduced or eliminated at the general partner’s discretion. Unlike bond coupons, there is no contractual obligation to maintain distribution levels. During the 2014–2016 oil crash and the 2020 COVID downturn, dozens of MLPs cut or suspended distributions, causing unit prices to collapse simultaneously.
What Happens to My MLP Units If the Partnership Converts to a Corporation?
Your units are exchanged for corporate shares, and the exchange is a taxable event. Because distributions reduce your cost basis over time, long-term holders often face significant taxable gains—including ordinary income from depreciation recapture—even if the new shares are worth less than the original purchase price. You receive no cash to pay the tax bill in all-stock conversions.
Can My Broker Be Held Liable for Overconcentrating My Portfolio in MLPs?
Yes. FINRA suitability rules and Reg BI require that recommendations be appropriate in the context of your entire portfolio. Placing 30%, 50%, or more of a portfolio in energy MLPs may constitute a failure to diversify, particularly for conservative or retirement-focused investors. Claims based on overconcentration have resulted in substantial arbitration awards.
How Long Do I Have to File a FINRA Claim for MLP Losses?
FINRA’s eligibility rule requires claims within six years of the event giving rise to the dispute. State statutes of limitation may impose shorter deadlines. The clock typically starts when the investor knew or should have known about the losses or misconduct—not necessarily when the distribution is cut. Consulting a securities attorney early preserves the widest range of legal options
What Is the Difference Between an MLP ETF and an MLP ETN?
An MLP ETF holds actual MLP units and is typically structured as a C-corporation, paying corporate tax before distributing to shareholders—creating a 2–3% annual tax drag. An MLP ETN is unsecured bank debt promising index returns. ETNs avoid the tax drag but carry issuer credit risk: if the bank fails, your investment ranks alongside other unsecured creditors. Neither product is FDIC insured.
Should I Hold MLPs in My IRA?
Holding MLP units directly in an IRA is generally inadvisable because MLP income generates UBTI. If UBTI exceeds $1,000 per year, the IRA must file Form 990-T and pay tax at rates up to 37%. A broker who placed MLP units in your IRA without disclosing UBTI risk may have made an unsuitable recommendation.
