The Liquidation Notice Dispute
A customer's margin account has long market value $50,000, debit $35,000, equity $15,000. FINRA maintenance requires 25%, or $12,500, so equity exceeds the requirement by $2,500. On Monday the market drops and the position falls to $44,000, making equity $9,000 against a $11,000 requirement - a $2,000 deficiency. The firm issues a maintenance call Monday afternoon with a three-business-day deadline. On Wednesday the position recovers to $48,000, eliminating the deficiency. On Thursday it falls again to $43,000. The customer claims the Wednesday recovery canceled the call and that the firm cannot liquidate Thursday.
1. Did the Wednesday recovery cancel the call, and can the firm liquidate Thursday?
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A maintenance call is typically satisfied only by deposit of cash or marginable securities, or by the account returning above the requirement - practices vary, but a temporary recovery does not automatically cancel a call already issued unless the firm's policy says so. Even if the Wednesday recovery cured the deficiency, the Thursday drop to $43,000 recreates one: equity = $43,000 − $35,000 = $8,000; requirement = 25% × $43,000 = $10,750; deficiency = $2,750. The firm may issue a new call or, under its customer agreement, liquidate without further notice to protect itself. The customer agreement typically grants the firm discretion to liquidate when margin is insufficient, and FINRA rules permit liquidation without notice in some circumstances. The firm should document the sequence and its policy.
2. What notice and documentation should the firm have provided, and what are the risks of liquidating Thursday?
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The firm should have sent written notice of the Monday call specifying the deficiency, the amount required, and the deadline, and recorded the call in the account. On Thursday, before liquidating, the firm should confirm the deficiency, attempt to contact the customer, and document the effort. Liquidating without notice risks a customer complaint or arbitration claiming the firm failed to follow its own procedures or acted prematurely. The firm's customer agreement and disclosure documents should authorize liquidation and specify that the firm may act without prior notice. The firm should retain the call notices, the market values used, and the liquidation records. If the firm liquidates, it should sell enough to restore compliance, not necessarily the entire position, and should confirm the execution and any remaining balance.