Customer Disclosures

These rules govern the firm's periodic and event-triggered disclosures to customers. Each rule has its own delivery trigger, frequency, and required content. The exam tests the rules as a memorizable matrix: which rule, which trigger, which frequency, which recipient.

Forwarding of Proxy and Issuer Materials

When a broker-dealer (BD) carries a customer account in street name (the firm holds the security in its own name as record holder, with the customer as beneficial owner), proxy materials, annual reports, and other issuer-related communications come to the firm rather than directly to the customer.

The proxy-forwarding rule requires the firm to:

• Forward proxy and issuer materials to the beneficial owner promptly upon receipt
• Solicit voting instructions from the beneficial owner
• Vote per beneficial-owner instructions when received
• Refrain from voting without instructions in most circumstances (specific exceptions apply for routine matters)

The firm is reimbursed by the issuer at specified rates for the cost of mailing materials and processing voting instructions. Reimbursement rates are set by FINRA and updated periodically.

Think of it this way: When you hold stock through a brokerage account in street name, the issuer does not know your name. The issuer knows the firm holds the shares. The proxy-forwarding rule makes the firm a pass-through: it must forward the materials to you and vote your instructions. The firm cannot vote your shares however it wants just because the firm is the record holder.

Exam Tip: Gotchas

• A firm cannot vote street-name shares without the beneficial owner's instructions (with limited routine-matter exceptions). The firm is the record holder but not the beneficial owner; the voting right belongs to the customer.

Margin Disclosure Statement

A margin disclosure statement must be delivered to non-institutional customers:

• At account opening (before any margin transactions can occur)
• Annually thereafter
• Posted on the firm's website if applicable

The disclosure must explain the risks of margin, including:

• The customer can lose more money than initially deposited
• The firm can force the sale of securities to meet a margin call without notice
• The firm can choose which securities to sell
• The firm can change margin requirements at any time without prior notice
• The customer is not entitled to an extension of time on a margin call

Exam Tip: Gotchas

• Margin disclosure is required at account opening AND annually thereafter for non-institutional customers. A firm that delivers the disclosure at account opening only has violated the margin disclosure rule starting in year two. The annual delivery typically rolls into the firm's combined annual disclosure mailing.

Extended-Hours Trading Risk Disclosure

Before any non-institutional customer first engages in extended-hours trading, the firm must deliver an extended-hours trading risk disclosure explaining:

• Lower liquidity in extended-hours sessions (fewer participants)
• Higher volatility (price swings on smaller trade volumes)
• Wider spreads between bid and ask prices
• News announcement risk (most material news is released after market close, and prices can react sharply at the open)
• No federal protection equivalent to NMS rules during extended hours (limited execution-quality protections)

This is a one-time, pre-trade disclosure. The customer does not need to receive it annually unless the firm modifies the disclosure. It only triggers when the customer is about to engage in extended-hours trading for the first time at the firm.

Exam Tip: Gotchas

• The extended-hours disclosure is a one-time, pre-trade disclosure, not an annual one. Compare to margin (account opening + annual) and SIPC (account opening + annual). The trigger is the customer's first extended-hours trade, not the calendar.

SIPC Information

Securities Investor Protection Corporation (SIPC) information must be delivered to customers:

• At account opening
• At least once each year thereafter

The disclosure must include SIPC's:

• Name
• Address
• Website (sipc.org)
• Telephone number

The disclosure is a notice that the firm is a SIPC member; it does not need to detail SIPC coverage limits in the annual notice (though most firms include a coverage summary).

Non-SIPC firms (firms that are not members of SIPC) cannot misuse the SIPC name or logo. A firm that is not a SIPC member but uses SIPC's name in marketing has violated the Securities Investor Protection Act.

Exam Tip: Gotchas

• SIPC disclosure is required at account opening AND at least once each year thereafter. This parallels the margin disclosure timing. Both are typically combined into a single annual disclosure mailing.

Investor Education and Protection (BrokerCheck)

Members must inform customers in writing at least once each calendar year of:

• FINRA's BrokerCheck program (a publicly accessible database of broker and firm registration information, disciplinary history, and regulatory actions)
• A toll-free hotline number to contact FINRA
• The website address for BrokerCheck (brokercheck.finra.org)

The disclosure can be delivered in writing, electronically, or as part of a combined annual disclosure mailing.

Exam Tip: Gotchas

• BrokerCheck disclosure is annual, not at account opening only. Compare to margin (account opening + annual) and SIPC (account opening + annual). The trigger is the calendar year; once per calendar year is sufficient regardless of when the account was opened.
• The three annual disclosures (margin, SIPC, BrokerCheck) are typically combined into a single annual mailing. A firm that sends three separate disclosures has not violated the rules but is doing more work than required.

Predispute Arbitration Agreements

Many brokerage account agreements contain predispute arbitration clauses requiring customers to resolve disputes through FINRA arbitration rather than in court. The predispute arbitration rule governs the disclosure and content requirements for these clauses.

Required Format Elements

A predispute arbitration agreement must include:

• A highlighted statement preceding the signature line, explaining that the customer is agreeing to arbitration
• The specific FINRA-required disclosures about arbitration (limitations on appeal, no class actions through FINRA arbitration, etc.)

Customer Copy Requirement

The firm must provide a copy of the agreement to the customer within 30 days of signing.

Substantive Limitations

The arbitration agreement cannot:

• Limit the customer's right to file class actions in court (class actions are explicitly excluded from FINRA arbitration; customers retain the right to court)
• Limit any party's rights inconsistent with FINRA arbitration rules (e.g., a clause requiring customer arbitration in a specific city contrary to FINRA's hearing-location rules is invalid)
• Disclaim FINRA's jurisdiction over disputes between the firm and registered persons (FINRA arbitration is mandatory between firms and reps)

Exam Tip: Gotchas

• Predispute arbitration agreements cannot bar class actions. Even if a customer signs a binding arbitration clause, the customer retains the right to participate in or initiate a class-action lawsuit in court.
• The customer must receive a copy of the predispute arbitration agreement within 30 days of signing. A firm that retains the only signed copy has violated the predispute arbitration disclosure rule.

Disclosure Inventory Summary

The exam tests these rules as a stacked matrix. Memorize the trigger and frequency for each:

Memory Aid: Picture the customer's mailbox in three timing buckets:

• Annual stack: three flyers stapled together every year (margin risk, SIPC information, BrokerCheck notice). One envelope, three rules satisfied.
• Trigger-and-done: arrives only when the event fires. Extended-hours risk before the customer's first after-hours trade; arbitration agreement copy within 30 days of signing.
• Pass-through: whenever an issuer mails the firm. Proxy and other issuer materials, forwarded to the beneficial owner.

The three annual disclosures (margin, SIPC, BrokerCheck) are typically combined into a single annual mailing to reduce paperwork. A firm that sends one annual document covering margin risk, SIPC information, and BrokerCheck satisfies all three rules.

Exam Tip: Gotchas

• The three annual disclosures (margin, SIPC, BrokerCheck) all require at least once per year. Failure of any one is a discrete violation. Combining them into one mailing is permissible and common; missing even one disclosure in the combined mailing is its own violation.