Activity in Margin Accounts
Now that you understand equity, maintenance, and the Special Memorandum Account (SMA), let's see how common account activities (purchases, sales, and withdrawals) work differently depending on whether the account is restricted or unrestricted.
Additional Purchases in a Long Account
The rules depend on the account's status under Regulation T (Reg T):
| Account Status | Rule for New Purchases |
|---|---|
| Unrestricted (equity >= 50% Reg T) | Can purchase using buying power without depositing new funds |
| Restricted (equity < 50% Reg T) | Must deposit 50% of the new purchase price |
- Any purchase increases the debit balance and may reduce SMA
- In a restricted account, the customer can still trade; they just need to deposit the full Reg T requirement for each new purchase
Exam Tip: Gotchas
- Restricted does NOT mean frozen. Customers in restricted accounts can still buy; they just need to deposit 50% of the new purchase price. The account is not locked.
Sales in a Long Account
Sale proceeds are treated differently based on the account's status:
| Account Status | Treatment of Sale Proceeds |
|---|---|
| Unrestricted | 100% of proceeds released to SMA |
| Restricted | 50% retained (reduces debit balance); 50% credited to SMA |
- The 50% retention rule applies only in restricted accounts
- This rule ensures that sales in a restricted account gradually restore the account toward the Reg T requirement
Think of it this way: When a restricted account sells stock, the broker-dealer keeps half the proceeds to pay down the margin loan (debit balance) and credits the other half to SMA. This steadily moves the account back toward compliance.
Example: A customer in a restricted account sells $10,000 of stock:
- $5,000 (50%) reduces the debit balance
- $5,000 (50%) is credited to SMA
Exam Tip: Gotchas
- In restricted accounts, 50% of sale proceeds are retained to reduce the debit balance. In unrestricted accounts, 100% goes to SMA. The retention rule only kicks in when equity is below 50%.
Cash and Securities Withdrawals
- Cash withdrawal: Reduces equity, increases debit balance; limited by SMA balance; maintenance must still be met
- Securities withdrawal: Reduces both long market value (LMV) and equity; SMA is reduced by 50% of the withdrawn securities' value; maintenance must still be met
Both types of withdrawals are subject to the same constraint: the withdrawal cannot cause equity to fall below the maintenance requirement.
Exam Tip: Gotchas
- Withdrawals (cash or securities) are always limited by maintenance requirements. Even if SMA shows available funds, a withdrawal that would drop equity below the maintenance floor is not permitted.
Simultaneous Purchases and Sales (Same Day)
- If a customer buys and sells on the same day, the transactions may partially offset each other
- The Reg T requirement is calculated on the net increase in market value (if any)
- If the sale proceeds exceed the purchase, excess is released to SMA
Cash Dividends and Interest
- Cash dividends received on long positions are credited to SMA dollar-for-dollar
- Interest charges on the margin loan increase the debit balance (reducing equity)
- Dividends effectively reduce the net cost of carrying a margin position
- Over time, interest charges can significantly erode equity. This is why margin is generally more appropriate for shorter-term positions.
Exam Tip: Gotchas
- Cash dividends increase SMA dollar-for-dollar (they function like cash deposits). Interest charges do the opposite: they increase the debit balance and decrease equity.