Quick Answer
Before or when opening a margin account, a broker-dealer provides a noninstitutional customer with a Margin Disclosure Statement and provides it at least annually thereafter. The agreement and disclosure explain credit obligations, deficiencies, calls, and the firm's authority to require collateral or liquidate securities when equity falls below requirements.
An approved account creates the credit relationship. Documentation and disclosures explain the risks and the firm's available response when that relationship develops a deficiency.
Margin Documents and Disclosures
- Margin Disclosure Statement: Given to a noninstitutional customer before or when opening a margin account, and at least annually thereafter.
- Disclosure purpose: Explains material risks of margin trading, including that the firm may require additional collateral, sell account securities, and increase its own margin requirements.
- Account documentation: The margin agreement and required disclosures document the customer's authorization and the firm's margin-credit relationship.
Deficiencies, Calls, and Liquidation
- Margin deficiency: A shortfall that occurs when account equity is below the applicable margin requirement.
- Margin call: The firm may require the customer to deposit additional cash or eligible securities to cure the deficiency.
- Liquidation authority: Under the margin agreement and disclosure, the firm may sell securities in the account to meet a margin requirement.
- The firm is not required to wait for the customer to meet a call before liquidating securities.
Credit extension under Regulation T → maintenance requirement under FINRA margin rules → deficiency → call or firm liquidation.
Exam Tip: Gotchas
A margin call does not promise the customer time to act. The margin agreement may permit the firm to liquidate account securities to satisfy the deficiency before the customer deposits funds or securities.