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Question

Difficulty: HardAccount Statements, Privacy Protection, and Regulation S-P

A retail client maintains a margin account at a registered broker-dealer. During a single calendar month, the account executes no buying or selling of securities, but receives a cash dividend payment from a long position held in the portfolio. In the same month, the broker-dealer updates its policies to begin sharing client nonpublic personal information with a non-affiliated financial marketing company. What are the broker-dealer's compliance obligations regarding account statement delivery and privacy disclosure administration under FINRA rules and SEC Regulation S-P?

  1. The broker-dealer must deliver an account statement for that month due to the dividend credit, and must provide a revised privacy notice offering a reasonable opt-out opportunity before sharing nonpublic personal information with the non-affiliated firm.Answer
  2. B
    The broker-dealer may defer issuing an account statement until the end of the quarter because no trades were executed, and it may immediately share the client's information provided an opt-out notice is included in the next annual mailing.
  3. C
    The broker-dealer must issue a monthly account statement only if penny stock transactions occurred, and SEC Regulation S-P requires affirmative opt-in consent from the client prior to any third-party information sharing.
  4. D
    The broker-dealer is required to deliver an account statement for that month, but SEC Regulation S-P strictly prohibits broker-dealers from disclosing customer nonpublic personal information to non-affiliated third parties under all circumstances.

Answer

The broker-dealer must issue a monthly account statement for the month in which the cash dividend was credited, and under SEC Regulation S-P, it must deliver a revised privacy notice giving the customer a reasonable opportunity and clear means to opt out prior to sharing nonpublic personal information with a non-affiliated third party.
Under FINRA Rule 2231, account statements must be delivered at least quarterly, but must be sent monthly for any month in which activity occurs. Account activity includes not only buy/sell transactions but also incoming cash dividends, interest, or funds transfers. Under SEC Regulation S-P, when a broker-dealer changes its privacy policy to share nonpublic personal information with non-affiliated third parties, it must issue a revised privacy notice and give customers a reasonable opportunity to opt out BEFORE any sharing takes place.

Step-by-Step Solution

1
Determine account statement delivery frequency under FINRA Rule 2231
Monthly delivery is required because receiving a cash dividend constitutes account activity during that month.
Brokerage account statements are required quarterly at minimum, but must be provided monthly during any month in which activity (trades, interest, dividends, or cash movements) occurs.
2
Determine privacy notice and opt-out requirements under SEC Regulation S-P
The firm must provide a revised privacy notice and a reasonable opportunity to opt out before disclosing information to non-affiliated third parties.
Regulation S-P mandates that broker-dealers notify customers of privacy policies and grant them an opt-out mechanism before nonpublic personal information is shared with non-affiliated third parties outside specific statutory exceptions.

Key Concept

Account Statement Frequency Triggers and Regulation S-P Privacy Opt-Out Requirements
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Topics

Account Statements, Privacy Protection, and Regulation S-P