Required Product Disclosures

Product disclosures cover more than the bank-sales warnings. This lesson also covers the prospectus delivery clock, what a trade confirmation and account statement must contain, and the extra layer of disclosure required before selling a penny stock.

What Must a Dealer Disclose When Selling at a Financial Institution?

When broker-dealers conduct retail securities business on the premises of a financial institution (bank, credit union, savings association, savings bank, or service corporation that takes retail deposits), the North American Securities Administrators Association (NASAA) Rules for Sales of Securities at Financial Institutions (1998) require specific disclosures to prevent customer confusion between insured deposits and uninsured securities. The rule does not apply to non-retail customers.

What Are the Four Required Disclosures?

1. Securities products are NOT insured by the Federal Deposit Insurance Corporation (FDIC) (or the National Credit Union Administration (NCUA), as applicable)
2. Securities products are NOT deposits or obligations of the financial institution
3. Securities products are NOT guaranteed by the financial institution
4. Securities products are subject to investment risks, including possible loss of principal

How and When Must the Disclosures Be Made?

The broker-dealer must also make reasonable efforts to obtain the customer's written acknowledgment of the disclosures during account opening.

Exam Tip: Gotchas

The "not FDIC insured, not a bank deposit, may lose value" disclosure is triggered by opening the account, not by each later transaction. Both the oral and written versions are due at or before that account-opening point, and the disclosure must be both oral AND written; doing only one is not sufficient.

What Else Does the Financial-Institution Rule Require?

• Physical separation: securities services must be physically separate from deposit-taking where practical, and always clearly distinguished; the broker-dealer's name must be displayed.
• Written networking arrangement: the arrangement between the broker-dealer and the institution must be in writing, allocate responsibilities and compensation, permit authorized supervisory and regulatory access, and define the duties of financial-institution personnel.
• Advertising on the premises: location-announcing or on-premises advertising generally carries the four warnings, and may use the conspicuous short form "Not FDIC Insured / No Bank Guarantee / May Lose Value." Narrow exceptions apply to short radio spots (30 seconds or less), certain electronic signs, and location-only signs.
• Similarly named products: a recommendation involving a non-deposit product with a name similar to the institution's requires policies designed to minimize customer confusion.
• Termination notice: the broker-dealer must promptly notify the financial institution when a dual-employed agent is terminated for cause.

Exam Tip: Gotchas

Confirmations and account statements identify the broker-dealer as the securities-services provider; they are not required to repeat the four product warnings on every document. The warnings themselves are an account-opening disclosure, not a recurring one.

When Must a Prospectus Be Delivered?

Under the federal registration provisions, it is unlawful to sell a security unless a prospectus meeting the Act's requirements has been delivered to the buyer. Dealers, including broker-dealer agents, must deliver a prospectus during the applicable post-effective delivery period.

A dealer who sells during the delivery period must deliver a final prospectus (or provide access to it) no later than the time of the trade confirmation. A preliminary prospectus (red herring) must reach anyone expected to receive a confirmation at least 48 hours before the confirmation is mailed.

Exam Tip: Gotchas

The 25-day period is the shortened period for exchange-listed or Nasdaq IPOs. Unlisted IPOs run much longer: 90 days, and follow-on offerings on the same unlisted markets run 40 days. Match the fact pattern's listing status and offering type before picking a number.

What Must a Trade Confirmation Disclose?

Broker-dealers must send a written trade confirmation to customers at or before the completion of each transaction (settlement date at the latest). The confirmation must disclose:

• date and time of the transaction;
• identity, price, and number of shares or units of the security;
• whether the firm acted as agent (and the commission) or principal (and the markup/markdown);
• the market where the transaction was executed;
• settlement date;
• name of the broker-dealer and the contra-party, if applicable.

For debt securities, the confirmation must also disclose the yield to maturity, the yield to call if applicable, and any markup or markdown.

How Often Must Account Statements Go Out?

Broker-dealers must send periodic account statements showing positions, balances, and transaction activity. The required frequency is at least once every calendar quarter for each customer whose account had a security position, money balance, or account activity since the last statement.

Purchases, sales, dividend or interest credits and debits, charges, transfers, and securities receipts or deliveries all count as activity. A change in market value of a held security is not account activity.

Exam Tip: Gotchas

There is no general monthly requirement. Monthly delivery to active accounts is common firm practice, not a rule. The FINRA standard and its historical NYSE counterpart have always required quarterly delivery at minimum, and the two were formally harmonized into one rule effective January 1, 2024. Do not confuse this with the options exchanges' distinct quarterly-plus-monthly formula, which is a separate, options-specific standard.

What Extra Disclosures Apply to Penny Stocks?

A penny stock is generally an equity security under $5 per share that is not listed on a national exchange. Before effecting a transaction in a penny stock, a broker-dealer must provide additional disclosures:

• an SEC-approved risk disclosure document;
• the bid and ask quotations and the compensation the broker-dealer will receive;
• a suitability determination, based on the customer's financial information;
• a written agreement from the customer authorizing the transaction;
• monthly account statements showing the estimated market value of each penny stock held, sent within 10 days after the end of the month. If the broker-dealer effects no penny stock transactions in the account for 6 consecutive months, the statement frequency drops to quarterly for the immediately following quiet period.

Exam Tip: Gotchas

Penny stocks are the one case where a monthly account statement is an actual rule, not firm practice. Everywhere else, FINRA's quarterly standard controls.

What Is the Options Disclosure Document (ODD)?

• The ODD's official title is "Characteristics and Risks of Standardized Options."
• It is published by the Options Clearing Corporation (OCC), not by FINRA and not by the broker-dealer.
• It describes the characteristics of exchange-traded options, including risks, tax consequences, and the mechanics of exercise and assignment.
• Delivery timing: the ODD must reach the customer at or before the time the account is approved for options trading (other than for an OCC-cleared OTC option). A firm may not approve the account, or accept an options order, until it has furnished the document. That is earlier than the customer's first options trade.

Exam Tip: Gotchas

Often confused: ODD delivery is a product disclosure the firm owes the customer, while the signed options account agreement is a customer commitment due within 15 days after approval. The ODD comes first, and the missing agreement does not undo it. The account-opening sequence itself is covered in the Customer Agreements and Account Types unit.

What Is a Municipal Official Statement?

• For municipal securities offerings, the official statement serves the same disclosure function that a prospectus serves for a registered stock or fund offering.
• It describes the issuer, the terms of the bond, and the security behind the debt.
• Broker-dealers must deliver the official statement to customers by no later than settlement of the transaction.

Exam Tip: Gotchas

Municipal securities are generally exempt from the registration requirements of the Securities Act of 1933, so there is no prospectus for a muni deal. The official statement fills that role, and its deadline is settlement, later than a prospectus's at-or-before-sale timing. Note that settlement is the latest permitted delivery, not a required date: delivering earlier, such as with the confirmation, also complies.

Which Disclosure Document Applies to Which Product?

What Should You Check on Exam Day?

• Match the fact pattern's listing status and offering type to the correct prospectus delivery period: 25/90/40 days, or none for an already-listed reporting issuer.
• List every required trade confirmation element, and remember debt securities add yield-to-maturity and yield-to-call.
• Walk through all five penny stock disclosures (risk document, quotes and compensation, suitability, written authorization, and monthly statements), and remember account statements are quarterly by default, monthly only for penny stocks.
• Keep the four financial-institution disclosures (not insured, not a deposit, not guaranteed, may lose value) separate from the product-specific disclosures; both can apply to the same sale.
• Match the product to its document: prospectus for registered stock and fund offerings, the OCC's ODD for options (at or before options-account approval), and the official statement for munis (by no later than settlement).