Recordkeeping, Supervision, and Compliance for Margin Lending
Margin lending is a supervised activity, and exam questions test the controls around it rather than the arithmetic. Firms must maintain records of margin agreements, disclosures, margin calls and their resolution, liquidations, and the approval of accounts. Supervision requires designated principals to review margin activity, monitor concentration and house requirements, and ensure that representatives do not open margin accounts or extend credit without proper authorization. Compliance includes periodic review of margin requirements, testing of the firm's margin calculations, and escalation of repeated calls or liquidation events.
Key concepts: written supervisory procedures (WSPs) tailored to margin; the role of the principal in approving accounts and reviewing exceptions; documentation of customer instructions and firm actions; and the distinction between regulatory requirements and house policy, which may be stricter. Traps: assuming that a representative can approve a margin account; assuming that a margin call need not be documented if resolved quickly; and forgetting that liquidation decisions must be recorded with the rationale. Questions also test the firm's obligation to supervise concentrated positions and to ensure that customers understand the risks disclosed at opening.
Worked rule of thumb: If an event changes the customer's margin status (opening, call, deposit, liquidation), there should be a record and a supervisory review. When a question asks who may approve a margin account, the answer is a designated principal or the firm under its procedures, not the representative alone. When it asks whether house requirements can exceed regulatory minimums, the answer is yes, and the firm must apply them consistently.