Margin Documentation, Disclosures, and Calls

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.

Which Margin Documents and Disclosures Are Required?

• Initial disclosure: Before or when opening a noninstitutional customer's margin account, provide the Margin Disclosure Statement or a substantially similar alternative.
• Disclosure purpose: The disclosure covers six margin-trading risks:
  • The customer can lose more than the amount deposited.
  • The firm can force the sale of securities or other assets in any of the customer's accounts held at the firm. The customer remains responsible for any shortfall after the sale.
  • The firm can sell securities or other assets without contacting the customer.
  • The firm, not the customer, chooses which securities or other assets to sell.
  • The firm can increase its house maintenance requirements at any time without advance written notice.
  • The customer has no right to an extension of time on a margin call.
• Account documentation: The margin agreement and required disclosures document the customer's authorization and the firm's margin-credit relationship.

What May the Firm Do When Equity Is Deficient?

• Margin deficiency: A shortfall occurs when the applicable margin requirement exceeds account equity.
• Regulation T margin call: A margin call is the creditor's demand for additional cash or eligible securities to reduce or eliminate a deficiency. The customer must satisfy it within one payment period after the deficiency was created or increased.
• Unmet Regulation T call: If the customer does not meet the call in full within the required time, the creditor must liquidate enough securities to meet the call or eliminate the deficiency on the liquidation day, whichever amount is less.
• Other margin deficiencies: A firm must obtain required margin or mark-to-market amounts as promptly as possible and within 15 business days after the deficiency occurs.
• Repeated deposit deferral: When a Regulation T margin call is required, a firm cannot permit a customer to make a practice of deferring cash or securities deposits beyond ordinary settlement or clearance.
• Repeated liquidation: A firm cannot permit a customer to make a practice of meeting Regulation T calls by liquidating the same or other commitments in the account.
• Firm liquidation authority: The disclosure warns that the firm may sell securities or other assets in any of the customer's accounts held at the firm without contacting the customer. The firm chooses the assets, and the customer remains responsible for any shortfall.

Exam Tip: Gotchas

• A margin call does not guarantee time to act. The firm may liquidate assets without contacting the customer, even after giving a specific deadline.

What Should You Check on Exam Day?

• For a noninstitutional customer, the initial disclosure requires individual delivery in a separate document or by itself on a separate page.
• For all noninstitutional customers with margin accounts, individually deliver the annual disclosure. It may join other account documents.
• Use at least once each calendar year, not the account-opening anniversary.
• If a firm permits noninstitutional customers to open accounts online or conduct securities transactions online, it must post the disclosure clearly and conspicuously on its website.
• Treat a Regulation T margin call as a demand due within one payment period. An unmet call requires liquidation.