Special Memorandum Account (SMA)

With your understanding of equity, excess equity, and maintenance requirements in place, you're ready for one of the most frequently tested margin concepts: the Special Memorandum Account.

What Is SMA?

• The SMA is a line of credit (bookkeeping entry) in a margin account that tracks the customer's accumulated buying power
• SMA represents the maximum amount a customer can borrow or use to purchase additional securities
• SMA is not cash; it is an accounting record of available credit

Think of it this way: SMA is a running tally of "margin room" that the customer has built up over time.

Exam Tip: Gotchas

• SMA is NOT cash. It is a bookkeeping entry (line of credit). The exam may present SMA as a cash balance to trick you.

How SMA Is Created

Exam Tip: Gotchas

• A cash deposit only builds SMA if it isn't needed to satisfy an existing Reg T call. A deposit used to cure a Reg T call restores compliance but does not also create SMA.

How SMA Is Used (Reduced)

Market Declines Do NOT Reduce SMA

This is the most frequently tested SMA concept on the Series 7:

• Once SMA is created, it is never reduced by a decline in market value
• SMA acts as a high-water mark; it records peak excess equity and does not retreat when the market falls
• Even if the account becomes restricted (equity below 50%), the SMA balance remains
• The customer can still use SMA in a restricted account, as long as doing so does not cause equity to fall below the maintenance requirement (25% for long, 30% for short)

Example: The market rises and creates $2,000 of SMA. Then the market falls and the account becomes restricted. The SMA is still $2,000. The customer can still withdraw cash or buy securities using that SMA, provided maintenance is maintained.

Exam Tip: Gotchas

• SMA survives market declines. If the exam presents a scenario where the market rises (creating SMA), then falls back below 50%, and asks what the SMA balance is, the answer is the same as before the decline. SMA only decreases through customer-initiated actions like purchases, withdrawals, or securities removal.
• SMA can be used in a restricted account as long as doing so does not violate the maintenance requirement. Cash dividends also increase SMA dollar-for-dollar.

SMA and Buying Power

• Buying power = 2 x SMA (each dollar of SMA supports a $2 purchase; $1 from the customer's credit, $1 as a loan at 50% Reg T)
• Example: SMA of $3,000 gives buying power of $6,000

Using buying power:

• Reduces SMA
• Increases the debit balance
• Increases the long market value (more securities purchased)

Exam Tip: Gotchas

• Buying power = 2 x SMA (and selling power for short accounts also = 2 x SMA). This 2x relationship comes directly from the 50% Reg T requirement.

SMA in Short Accounts

• SMA in short accounts works the same way but uses selling power instead of buying power
• Selling power = 2 x SMA (the customer can sell short additional securities worth 2x the SMA)
• SMA in short accounts is created when short market value (SMV) falls (favorable) and excess equity appears
• SMA is not reduced when SMV rises (unfavorable); same high-water mark principle

Prohibited Uses of SMA

• SMA cannot be used if doing so would cause the account equity to fall below the greater of $2,000 or the maintenance margin requirement
• The firm must check compliance with that floor before allowing any SMA withdrawal or purchase
• A payment or transfer out of SMA, whether to the customer or to any of the customer's other accounts, reduces the SMA balance by that amount

What Should You Check on Exam Day?

• SMA is a bookkeeping entry, never cash
• A market decline never reduces SMA; only customer-initiated purchases, withdrawals, or securities removal do
• Buying power (long) and selling power (short) both equal 2x SMA
• Any SMA use is blocked if it would drop equity below the maintenance requirement, even if the SMA balance shows funds available