Margin, Suitability, and Customer Account Rules
Domain 7 - Margin, Suitability, and Customer Account Rules
This domain tests the arithmetic of Regulation T and FINRA Rule 4210, plus the account-opening and recommendation standards that apply before any trade is placed.
Margin mechanics
- Reg T initial margin for long stock is 50% of the purchase price; FINRA maintenance is 25% of market value for long stock and 30% for short stock, subject to a $5-per-share minimum.
- Long options require 100% of premium. Short uncovered options follow a formula of premium plus a percentage of the underlying, minus any out-of-the-money amount, subject to a minimum.
- A Reg T call must be met within two business days after the settlement date; a maintenance call must be met promptly.
- Pattern day traders must maintain $25,000 of equity in a margin account.
Suitability and accounts
- Regulation Best Interest requires broker-dealers to act in a retail customer's best interest, with care, disclosure, conflict-of-interest, and compliance obligations. FINRA Rule 2111 applies to all recommendations, including institutional ones.
- Know-your-customer under Rule 2090 requires understanding the customer and having authorization to act.
- Discretionary authority requires written authorization within 30 days plus firm acceptance; third-party powers of attorney need similar documentation.
- TOD registrations avoid probate; UTMA accounts are irrevocable gifts; joint tenants carry right of survivorship.
- Holds on disbursements for suspected exploitation of seniors may run 15 business days, extendable to 25.
Worked example
Buy 1,000 shares at $40 = $40,000, so the Reg T deposit is $20,000. If the stock falls to $25, market value is $25,000 and equity is $5,000. Maintenance is 25% × $25,000 = $6,250, so the account is in deficit and receives a call for $1,250.
Traps
- Applying the 50% initial requirement to an existing position after trade date.
- Confusing a maintenance call with a Reg T call.