An existing retail client who currently holds a non-discretionary cash brokerage account with a broker-dealer contacts a registered representative to discuss opening a new discretionary margin account to execute a complex options trading strategy. Before the customer executes any documents or places an order, the representative discusses the features of discretionary margin trading and recommends a specific option strategy suitable for the client's financial profile. Regarding the delivery requirements of Form CRS (Relationship Summary) and Regulation Best Interest (Reg BI) compliance, which of the following statements correctly describes the firm's regulatory obligation?
- The firm must re-deliver Form CRS to the customer before or at the earliest of recommending the new investment strategy, placing an order, or opening the new discretionary margin account, because opening a new account type or recommending a new service triggers mandatory Form CRS re-delivery.Answer
- BForm CRS delivery is not required because the customer is an existing retail client who already received Form CRS upon initial account opening, and re-delivery is only required annually or when material updates are filed with the SEC.
- CThe firm satisfies its Regulation Best Interest duties by fulfilling reasonable-basis and customer-specific suitability obligations, but is exempt from the Care Obligation and Form CRS re-delivery because discretionary margin accounts are governed solely by FINRA Rule 2111.
- DForm CRS re-delivery must occur within 15 days following account approval, coincident with the deadline for the customer to return the signed options account agreement.
Answer
The firm must re-deliver Form CRS to the customer before or at the earliest of recommending the new investment strategy, placing an order, or opening the new discretionary margin account, because opening a new account type or recommending a new service triggers mandatory Form CRS re-delivery.
Under SEC Rule 17a-14 (Form CRS) and Regulation Best Interest, broker-dealers are required to re-deliver Form CRS to an existing retail client before or at the earliest of: opening a new account that is different from the retail investor's existing account, recommending a rollover of assets, or recommending a new brokerage service or investment strategy not previously provided. Because the client is opening a new discretionary margin account and receiving a recommendation for a new options strategy, Form CRS re-delivery is mandated prior to or at the time of the recommendation, order placement, or account opening.
Step-by-Step Solution
Key Concept
Form CRS Re-delivery Triggers for Existing Retail Clients
Hints
1
Consider whether Form CRS is required to be delivered more than once during a customer relationship.
2
Recall the specific events that trigger re-delivery of Form CRS to an existing retail client under SEC rules.
3
Opening a different type of account (e.g., transitioning from cash to discretionary margin) or recommending a new investment strategy is one of the explicit triggers requiring Form CRS re-delivery.
Practice More
Review the four core obligations of Regulation Best Interest (Disclosure, Care, Conflict of Interest, and Compliance) and how Form CRS integrates into the Disclosure Obligation.
Alternative Method
Memorize the three 'R's of Form CRS re-delivery for existing clients: (1) Recommending a rollover, (2) Recommending a new service/strategy, and (3) Re-opening/opening a new account type.
Estimated Time:3m 0s