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Question

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

An investor establishes a retail brokerage relationship with a firm and receives the initial privacy disclosure. During the first year, the investor trades actively. Throughout the second calendar year, no new trades are executed, though the account continues to hold long equity positions. During this second year, the broker-dealer modifies its privacy policy to begin sharing nonpublic personal information (NPI) with nonaffiliated financial institutions. Under Regulation S-P and FINRA account disclosure rules, which obligation applies to the broker-dealer regarding privacy notices and statement delivery during the second year?

  1. The firm must provide an annual privacy notice containing a reasonable opt-out opportunity before sharing NPI with nonaffiliated third parties, and must deliver account statements at least quarterly.Answer
  2. B
    The firm is relieved of sending an annual privacy notice due to account inactivity, but must continue delivering account statements on a monthly basis as long as long positions are held.
  3. C
    The firm must obtain express written opt-in consent prior to sharing any customer NPI with nonaffiliated third parties, and it may suspend account statement delivery until new trading activity occurs.
  4. D
    The firm satisfies Regulation S-P by delivering privacy notices only upon account opening and account closure, provided that account statements are delivered monthly regardless of trade activity.

Answer

The broker-dealer must deliver an annual privacy notice featuring a reasonable opt-out method prior to sharing nonpublic personal information with nonaffiliated third parties, and must send account statements at least quarterly when no trading activity occurs.
Under SEC Regulation S-P, a retail investor with an open brokerage account has an ongoing customer relationship, requiring the firm to provide an initial privacy notice at account opening and an annual privacy notice every year thereafter. If the firm intends to share nonpublic personal information with nonaffiliated third parties, it must provide a reasonable opt-out mechanism. Additionally, under FINRA rules, broker-dealers must deliver account statements monthly during months with activity, but may send them quarterly when there is no trade activity during the period yet positions remain.

Step-by-Step Solution

1
Determine customer relationship status and privacy notice requirements under Regulation S-P.
An individual with an open brokerage account is a 'customer' with an ongoing relationship, requiring an initial privacy notice at account opening and an annual privacy notice thereafter.
Regulation S-P distinguishes between casual consumers and ongoing customers. Ongoing customers must receive annual disclosures, especially when NPI sharing policies with nonaffiliated third parties change.
2
Identify opt-out rule obligations under Regulation S-P.
The firm must provide customers with a reasonable opportunity and clear means to opt out of having their nonpublic personal information shared with nonaffiliated third parties.
Reg S-P operates on an opt-out framework (giving customers the right to opt out) rather than requiring affirmative opt-in consent.
3
Determine required account statement delivery frequency under FINRA Rule 2231.
Statements must be delivered monthly for any month in which trade activity occurs, but at least quarterly if there is no activity and long/short positions or cash balances are maintained.
Because no trades occurred during the period, the default delivery requirement drops from monthly to quarterly.

Key Concept

Regulation S-P privacy notice and opt-out obligations combined with FINRA account statement delivery frequency rules.
Estimated Time:1m 30s
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Topics

Account Statements, Privacy Protection, and Regulation S-P