Communications with customers chapter recap

Ch 4-7 Exam Essentials — Communication with Clients and Prospects

Required disclosures. Product (risks, fees, conflicts, tax), relationship (Form ADV 2A/2B, Form CRS, advisory contract), and changes in circumstances. Form CRS delivered at account opening; ADV 2A before or at contract.

Performance guarantees. Prohibited unless naming a specific true guarantor (U.S. Treasury direct obligations, FDIC-insured deposits, named issuer guarantor).

Registration as approval. Always prohibited. Registration is paperwork, not endorsement.

Senior designations. NASAA Model Rule permits only accredited designations (CFP, CFA, ChFC, CLU, CPA/PFS). Non-accredited "senior specialist" titles prohibited.

Tombstone ads (SA §134). May include issuer, security, price, underwriters, prospectus availability date. No recommendations, no projections.

New account opening (FINRA 4512). Name, address, age, SSN/EIN, occupation/employer, RR signature, principal approval; plus profile (income, NW, objectives, risk tolerance) for accounts where firm makes recommendations. Update every 36 months.

Margin (Reg T + FINRA 4210). Reg T initial 50%. FINRA maintenance: 25% long, 30% short. $2,000 minimum equity to open. Required: margin (credit) agreement, hypothecation agreement; optional: loan consent.

Options (FINRA 2360). OAD delivered at or before account approval. Signed Options Account Agreement within 15 days, else closing-only. ROP approval required.

Options valuation. Premium = intrinsic + time. ITM call: market > strike. ITM put: market < strike. OTM premium is 100% time value.

FINRA 2210 categories. Retail = > 25 retail in 30 days (principal approval, possible filing). Institutional = institutional only (supervisory procedures). Correspondence = ≤ 25 retail in 30 days (sample review).

Books and records (SEC 17a-3, 17a-4). Customer account records 6 years (first 2 easily accessible). Order tickets, confirms, 2210 comms 3 years. Org documents lifetime + 2 years.

Regulation S-P. Initial privacy notice at relationship start; annual notice thereafter (with exceptions); opt-out for nonaffiliated sharing; Safeguards Rule with written policies and breach notification.

Communications exam traps — consolidated

1. "SEC-registered, ensuring quality" — always a violation. Registration confers no endorsement.
2. "Guaranteed 8% return" — always prohibited. Naming a specific true guarantor (Treasury, FDIC) is the only safe path.
3. "OAD must be signed within 15 days." Wrong — the OAD is delivered, not signed. The Options Account Agreement is the document signed within 15 days.
4. "Maintenance margin is 50%." Wrong. Reg T initial is 50%. FINRA maintenance is 25% long, 30% short.
5. "A tombstone ad may include a buy recommendation." Wrong. SA §134 enumerates exactly what may be included; recommendations are not on the list.
6. "Correspondence requires principal approval before each message." Wrong. Sample-review supervision is the standard; pre-use approval is required for retail communications.
7. "Customer account records are kept 3 years." Wrong. Account records are 6 years; orders/confirms are 3 years.
8. "Annual privacy notice can be skipped if customer consents." Wrong. The exception is for firms that have not changed their disclosed practices and share only within permitted exceptions — not customer waiver.
9. "Margin call satisfied by buying more stock." Wrong. A maintenance call requires deposit of cash or marginable securities, not new purchases.
10. "A static social media post is correspondence." Wrong. Static social content is typically retail communication (advertising-style); interactive replies may be correspondence.