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
| Event | Effect on SMA |
|---|---|
| Market value rises above Regulation T (Reg T) (excess equity) | SMA increases by the amount of excess equity |
| Sale of securities | SMA increases by 50% of sale proceeds (the Reg T release) |
| Cash deposit | SMA increases dollar-for-dollar |
| Cash dividend received | SMA increases dollar-for-dollar |
| Interest earned | SMA increases dollar-for-dollar |
| Deposit of marginable securities | SMA increases by the loan value (50%) of the securities deposited |
How SMA Is Used (Reduced)
| Event | Effect on SMA |
|---|---|
| Purchase of securities using buying power | SMA decreases by 50% of the purchase (the Reg T requirement) |
| Cash withdrawal | SMA decreases dollar-for-dollar |
| Securities withdrawal | SMA decreases by the loan value (50%) of the securities withdrawn |
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 minimum maintenance requirement
- The firm must check maintenance compliance before allowing any SMA withdrawal or purchase
- SMA cannot be transferred between accounts (it belongs to the specific margin account)