Customers sometimes need to withdraw cash or securities from their accounts, or respond to tender offers. These actions have specific rules you should know for the exam.
Cash and Security Withdrawals
- Customers may request withdrawal of free credit balances (cash) at any time
- Security withdrawals require the securities to be:
- Fully paid (not purchased on margin with an outstanding debit balance)
- Not subject to lien or hypothecation (not pledged as collateral)
- Securities in a margin account that are pledged as collateral cannot be withdrawn until the debit balance is satisfied
- Firms must send customers a free credit balance notification at least quarterly, reminding them the cash is available for withdrawal or investment
Think of it this way: Hypothecation means pledging your securities as collateral for a margin loan. While the loan is outstanding, the firm has a lien on those shares, so you cannot pull them out. Pay off the loan first, then you can withdraw.
Exam Tip: Gotchas
- Free credit balances must be available on request. The firm cannot refuse or delay a cash withdrawal. However, margined securities stay pledged to the firm until the margin loan is repaid.
Tender Offers
A tender offer is a public offer to purchase shares from existing shareholders, typically at a premium to the current market price.
- When a tender offer is made for securities held in customer accounts, the firm must promptly notify the customer
- The customer decides whether to tender. The firm may not tender customer securities without authorization
- Short tendering (tendering more shares than actually owned) is prohibited under SEC rules
- A customer's tendering capacity equals their net long position: long shares minus short shares in the same security, across all accounts
Example: A customer is long 700 shares in a margin account and short 300 shares in a separate short account. Net long = 700 minus 300 = 400 shares. Only 400 shares may be tendered.
Exam Tip: Gotchas
- The firm cannot make the tender decision for the customer. If a question describes a firm tendering shares "in the customer's best interest" without getting authorization, that is a violation regardless of how beneficial the tender might be.
- Net long = long minus short, across all accounts. A customer long 700 and short 300 in the same security at the same firm may tender only 400 shares. The gross long position of 700 is not the limit.