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

A compliance auditor is reviewing a broker-dealer's policies regarding SEC Regulation S-P and FINRA customer account disclosure regulations. Which of the following compliance statements regarding privacy notice delivery, customer classifications, and account statement frequency rules are CORRECT?

  1. An individual who completes a single, isolated currency exchange transaction at a broker-dealer branch is a consumer and is not required to receive an initial privacy notice if the firm does not disclose nonpublic personal information to nonaffiliated third parties.Answer
  2. Broker-dealers must deliver customer account statements at least monthly during any month trade or income activity occurs, but may send statements quarterly when an account remains inactive.Answer
  3. C
    A broker-dealer satisfies Regulation S-P opt-out requirements by requiring customers to compose and mail a custom physical letter stating their opt-out choices within 30 days.
  4. D
    Under Regulation S-P, both consumers and former customers must continue to receive annual privacy notices for two years after their relationship with the firm ends.

Answer

The correct statements are that an individual performing a single isolated transaction without an ongoing relationship is a consumer who only requires a privacy notice if nonpublic information is shared with nonaffiliated third parties, and that account statements must be delivered monthly during months with account activity, but may be sent quarterly when accounts are inactive.
Under SEC Regulation S-P, an individual engaging in an isolated transaction is a consumer; an initial privacy notice is required for consumers only if the broker-dealer intends to share their nonpublic personal information with nonaffiliated third parties. Furthermore, under FINRA Rule 2231, customer account statements must be delivered monthly whenever there is activity in the account during that month, whereas inactive accounts require statement delivery at least quarterly.

Step-by-Step Solution

1
Evaluate consumer versus customer status under SEC Regulation S-P.
A consumer has a one-time transaction or isolated interaction. The firm must provide an initial privacy notice to a consumer ONLY IF it intends to share nonpublic personal information with nonaffiliated third parties. In contrast, a customer has an ongoing relationship and must always receive an initial notice at or before account opening.
Reg S-P establishes distinct privacy disclosure triggers based on whether a relationship is continuous (customer) or transactional/isolated (consumer).
2
Evaluate account statement delivery frequency under FINRA Rule 2231.
Statements must be delivered at least quarterly for inactive accounts, but monthly for any month in which trade activity, dividend/interest payouts, or penny stock positions exist.
FINRA mandates increased statement delivery frequency during active periods to keep investors informed of asset movement.
3
Evaluate opt-out method standards under Regulation S-P.
A firm must offer reasonable opt-out means (e.g., electronic opt-out links, toll-free phone numbers, or prepaid opt-out check boxes). Forcing a client to write a custom letter is explicitly deemed unreasonable.
Reg S-P protects consumers by preventing firms from making the opt-out procedure deliberately burdensome.
4
Evaluate annual privacy notice requirements for former clients.
Annual privacy notices are only required for active, ongoing customer relationships. Once an account is closed or a consumer transaction ends, annual delivery obligations cease.
Former customers no longer maintain an active customer relationship requiring ongoing annual disclosures.

Key Concept

Regulation S-P distinguishes consumers from customers and mandates reasonable opt-out methods, while FINRA rules enforce monthly account statement delivery for active accounts and quarterly for idle accounts.
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Topics

Account Statements, Privacy Protection, and Regulation S-P