Disclosure of Credit Terms

The credit-disclosure rule is the SEC's margin disclosure rule. It is narrow in scope:

• It does not regulate whether a customer can use margin (that is Reg T and the FINRA margin requirements)
• It does not govern how the customer's collateral is held (that is the customer protection rule, the customer-securities-lending requirement, and the hypothecation rules)
• It focuses purely on what the customer is told about the cost of margin: the interest rate, how it is calculated, and how that calculation evolves over the life of the margin loan

Initial Disclosure at Account Opening

At opening, give or send written statements covering these required categories:

Debit-balance disclosure also addresses whether cash-account credit balances receive credit. For an account opened by telephone, the firm may communicate the required information orally then send the written statements immediately afterward.

Why Each Disclosure Matters

• Annual interest rate(s): The customer needs to know the actual rate, not just that interest will be charged. Most firms charge a base rate (often a published index plus a spread) that varies with the size of the customer's debit balance. The customer needs the full schedule.
• Method of calculating interest: Simple interest on a daily debit balance is the typical method, but variations exist (e.g., interest compounded monthly, interest computed on average daily balance). The customer needs to know which.
• Conditions: When does interest start accruing? Are there any grace periods or thresholds? The customer needs to understand the triggers.
• Daily debit balance method: The interest base is the daily debit balance. The firm must explain how that balance is computed (e.g., does the firm net any free credit balances against debits before computing interest).

Exam Tip: Gotchas

• A rate sheet alone is insufficient. The opening requirement covers seven categories, including other charges, collateral terms, and specific variable-rate conditions.

Periodic Statements

For each account in which credit was extended, give or send statements at least quarterly showing the required details:

• Opening and closing balances, and the date, amount, and description of debit and credit entries
• The total interest charge, interest-period dates, annual rates and charges at each rate, and the applicable debit balances or separate average balances for each rate
• Other charges arising from credit, plus the required additional balance and retention wording when the interest and statement periods differ

The quarterly statement is the customer's window into the cost of the margin loan over time. A customer with a stable debit balance can compare the quarterly interest charge to the disclosed rate and verify the firm is computing interest correctly.

Quarterly Frequency, Monthly Acceptable

The rule requires "quarterly" statements; firms that send monthly statements (which is common for active accounts) easily satisfy the requirement. The disclosure requirement is a floor, not a ceiling.

Notice of Change

For a change in the disclosed terms and conditions of credit charges, provide at least 30 days' written notice, unless an exception applies.

• A change in the spread above the base rate requires advance notice
• A change in the calculation method (e.g., from simple to compound) requires advance notice
• A change in the base rate itself (e.g., the firm switches from prime + 100bps to SOFR + 250bps) requires advance notice

Changes required by law do not require this advance notice. If a change lowers the customer's interest charge, notice may be given within a reasonable time afterward. A rate movement under specifically disclosed variable-rate conditions is different from changing the agreed benchmark, spread, or calculation terms.

The advance-notice requirement gives the customer the opportunity to:

• Pay down the debit balance before the change takes effect
• Move to a different firm if the new terms are unacceptable
• Renegotiate or otherwise plan for the higher cost

Real-world example: A firm wants to raise its margin rate from prime + 1.5% to prime + 2%. The firm cannot effect the change retroactively. It must send written notice to all margin customers, giving them advance time before the new rate applies. A customer who pays down the debit balance during that window does not experience the rate increase.

Exam Tip: Gotchas

• The credit-disclosure rule is about INTEREST DISCLOSURE, not about whether margin is permissible. A firm that lends margin in compliance with Reg T and the FINRA margin requirements still violates the disclosure rule if it fails to deliver the prescribed interest disclosures at account opening and quarterly thereafter.
• For a covered change, notice merely a few days before effectiveness is insufficient: 30 days is the standard. Evaluate the specific exceptions before treating every later notice as a violation.

How the Credit-Disclosure Rule Connects to Reg T and the FINRA Margin Requirements

The three rules cover different slices of the margin transaction:

Reg T and the FINRA margin requirements are the substantive layers (how much credit, what collateral). The credit-disclosure rule is the disclosure layer (what the customer must be told about the cost of credit). A customer's margin account touches all three: Reg T at purchase, credit disclosures at account opening and quarterly thereafter, FINRA margin every day in between.

Exam Tip: Gotchas

• A firm that complies with Reg T (initial margin) and the FINRA maintenance-margin requirement can still violate the credit-disclosure rule by failing to disclose the interest terms. The substantive and disclosure obligations are separate. Compliance with one does not satisfy the other.

What Should You Check on Exam Day?

• Can you identify the seven opening-disclosure categories and the telephone-opening exception?
• Can you apply the 30-day change-notice standard and its exceptions?
• Can you explain why a firm that fully complies with Reg T and FINRA margin requirements can still violate the credit-disclosure rule?
• Do you know the minimum frequency for periodic statements showing accrued interest and any changes in rate or calculation method?