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Difficulty: Very hardAccount Statements, Privacy Protection, and Regulation S-P

A broker-dealer provides financial services to two individuals: Individual X purchases a single cashier's check at the firm's branch office and has no ongoing account or further interactions with the firm. Individual Y maintains an established margin account that had no security purchases or sales during the past calendar quarter, but received a cash dividend credit on the 15th day of the second month in that quarter. If the firm does not disclose non-public personal information (NPI) to non-affiliated third parties outside standard regulatory exceptions, which of the following statements correctly identifies the firm's compliance obligations under SEC Regulation S-P and FINRA rules for both individuals?

  1. A
    Individual X must receive an initial privacy notice at the time of the transaction, and Individual Y requires only quarterly account statements because cash dividend credits do not constitute account activity.
  2. B
    Both Individual X and Individual Y are classified as customers under Regulation S-P and must receive initial and annual privacy notices, but Individual Y requires monthly statements continuously for all twelve months of the year.
  3. Individual X is a consumer and is not required to receive a privacy notice because no non-affiliated NPI sharing occurs, whereas Individual Y must receive a monthly account statement for the month the dividend was credited and quarterly statements for inactive periods.Answer
  4. D
    Individual X is classified as a customer requiring annual privacy notices, while Individual Y must receive an initial privacy notice upon dividend payout and monthly statements for all three months of the quarter.

Answer

Individual X is a consumer and is not required to receive a privacy notice because no non-affiliated NPI sharing occurs, whereas Individual Y must receive a monthly account statement for the month the dividend was credited and quarterly statements for inactive periods.
Under SEC Regulation S-P, an individual who obtains a one-time financial service (such as purchasing a cashier's check) without establishing an ongoing relationship is classified as a consumer. Broker-dealers are not required to provide initial privacy notices to consumers unless the firm intends to disclose non-public personal information (NPI) to non-affiliated third parties outside permitted regulatory exceptions. Because no NPI sharing occurs, no privacy notice is required for the cashier's check purchaser. For an established customer account, FINRA Rule 2231 requires statement delivery on at least a quarterly basis when securities or funds are held, but mandates a monthly statement for any specific month in which account activity occurs. Because receiving a cash dividend credit constitutes account activity, a monthly statement must be delivered for that specific month.

Step-by-Step Solution

1
Determine the Regulation S-P classification and privacy notice requirements for Individual X.
Individual X is a 'consumer' (one-time interaction without an ongoing customer relationship). Under Regulation S-P, broker-dealers are only required to deliver an initial privacy notice to a consumer if the firm intends to disclose non-public personal information (NPI) to non-affiliated third parties outside statutory exceptions. Since no such sharing occurs, no privacy notice is required.
Consumer privacy disclosures are conditional upon third-party information sharing policies, unlike customer relationships which mandate initial notices.
2
Determine the Regulation S-P classification and FINRA statement delivery frequency for Individual Y.
Individual Y is a 'customer' (ongoing relationship). Under FINRA Rule 2231, broker-dealers must deliver account statements at least quarterly. However, for any month in which 'activity' occurs in the account, a monthly statement is required. Activity includes interest, dividends, security trades, and cash transfers. Therefore, the dividend credit on month two mandates a monthly statement for that month, while quarterly statements cover inactive periods.
Dividend credits represent financial entries into the account, meeting the regulatory definition of account activity under FINRA statement rules.

Key Concept

Regulation S-P Consumer vs. Customer Privacy Notice Rules and FINRA Account Statement Delivery Triggers
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Topics

Account Statements, Privacy Protection, and Regulation S-P