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Question

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

Under SEC Regulation S-P and FINRA rules governing privacy protection and customer disclosures, a broker-dealer opens a new retail brokerage account for an individual investor who executes an initial trade. Over the subsequent eight months, the client carries a cash balance but engages in no further trading activity and holds no security positions. Which of the following statements correctly describes the broker-dealer's ongoing disclosure and account statement delivery obligations to this client?

  1. The broker-dealer must deliver an initial privacy notice at or before account opening, provide an annual privacy notice for the duration of the customer relationship, and send account statements at least quarterly.Answer
  2. B
    Because the client executed only one transaction, the client is classified as a consumer rather than a customer, requiring privacy disclosures only at account opening and upon account termination.
  3. C
    The firm may suspend quarterly account statement delivery after six months of inactivity, provided it delivers a consolidated annual statement along with the annual Regulation S-P opt-out notice.
  4. D
    The firm is exempt from delivering annual Regulation S-P privacy notices as long as it sends monthly account statements and does not disclose nonpublic personal information to nonaffiliated third parties.

Answer

The broker-dealer must deliver an initial privacy notice at or before account opening, provide an annual privacy notice for the duration of the customer relationship, and send account statements at least quarterly.
Under Regulation S-P, establishing an account creates a customer relationship, requiring the broker-dealer to deliver an initial privacy notice at or before account opening and an annual privacy notice every year the account remains open. Under FINRA Rule 2231, while active trading triggers monthly account statement delivery, an inactive account holding cash or securities must still receive account statements at least quarterly.

Step-by-Step Solution

1
Determine customer relationship status under Regulation S-P
The individual is classified as a 'customer' (not just a 'consumer') because opening an account creates a continuing financial relationship.
Under Regulation S-P, a customer relationship requires delivering an initial privacy notice at account opening and an annual privacy notice every year thereafter.
2
Determine account statement delivery frequency under FINRA Rule 2231
Account statements must be delivered monthly for any month with trading activity, and at least quarterly for inactive accounts holding cash or security positions.
Since the account was inactive for eight months but maintained a cash balance, statement delivery drops from monthly to quarterly schedule, but cannot be suspended entirely.

Key Concept

Regulation S-P Customer Privacy Notice Timelines & FINRA Account Statement Delivery Frequency Rules
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Topics

Account Statements, Privacy Protection, and Regulation S-P