Unit 24: Account Features

If someone wants to buy $2000-$4000 of stock in Margin Account, what is the Minimum deposit?

$2000

When customers open margin accounts, when must they be provided with a risk disclosure document? 1) Before initially opening the account 2) Quarterly 3) Semiannually 4) Annually A) I only B) III and IV C) I and II D) I and IV

1) Before initially opening the account & 4) Annually. The risk disclosure document is required before opening the account and annually after opening the account. (LO 24.b - Question ID: 1280191)

If someone wants to buy over $4000 worth of stock in Margin Account, what is the Minimum deposit?

50% of purchase price

Cash Account

A brokerage account in which all transactions are made on a strictly cash basis. No Margin Borrowing, must need 100% of cash at hand.

Which of the following would constitute improper use of a customer's securities or funds? 1) Agreeing to a stock purchase the representative thinks is beyond the client's means 2) Selling a bond at the client's insistence during a period of high interest rates 3) Lending securities for a short sale when the client has agreed to it on the phone 4) Borrowing a client's funds without permission, though it will be repaid the same day A) III and IV B) I and III C) I and II D) II and IV

A) III and IV Though a customer may be ill-advised, complying with it does not constitute improper use. To lend securities without a signed loan consent agreement does constitute improper use, as does borrowing the client's funds without permission of the client, no matter how briefly the funds will be held. (LO 24.b -Question #10 of 20 - Question ID: 1269897)

Which if the following may not be purchased on margin but can be used as collateral for a margin loan after being held for 30 days? A) Mutual funds B) Options C) Warrants D) Equities

A) Mutual funds Neither mutual funds nor new issues can be purchased on margin. However, both may be used as collateral for a margin loan after being held for 30 days. Options are not marginable securities, but equities, bonds, and warrants are. (LO 24.b - Question #19 of 20 - Question ID: 1269873)

Which of the following transactions if any, cannot be done in a cash account? A) Sell 100 ABC to open. B) Any of these could be done in a cash account. C) Buy 100 ABC to open. D) Buy 100 ABC to close.

A) Sell 100 ABC to open. Selling to open (a short sell) can only be done in a margin account. It cannot be done in a cash account. (LO 24.a - Question #7 of 20 - Question ID: 1269901)

To meet a Regulation T margin call, a customer would have how long? A) Settlement plus two additional business days B) Trade date plus five additional calendar days C) Trade date plus two additional business days D) Settlement date plus two additional calendar days

A) Settlement plus two additional business days The rule requires that the call be met within two business days of the settlement date, referred to as S + 2. If regular way settlement was T + 2, adding two additional business days to the trade date would be T + 4. (LO 24.c- Question #13 of 20 - Question ID: 1269890)

Which type of accounts bills a single fee annually for a group of services that might include asset allocation, portfolio management, and executions? A) Wrap account. B) Cash account. C) Option account. D) Margin account.

A) Wrap account. Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. A wrap account can be a cash or margin account and like any other be approved for option trading. (LO 24.e -Question #9 of 20 - Question ID: 1269883)

A registered representative is discussing fee-based and commission-based accounts with a customer. All of the following are true except A) fee-based accounts are most suitable for those who do very little trading during the course of the year. B) a fee-based account charges a single annual fee that can be a fixed dollar amount or a percentage of assets under management. C) a commission based account bills for each transaction separately. D) disclosure of what services the fees cover in a fee-based account must be made to the customer before the account is opened.

A) fee-based accounts are most suitable for those who do very little trading during the course of the year. Fee-based accounts charging a fixed dollar amount or a percentage of assets under management are more suitable for those doing at least a moderate amount of trading. Commission based accounts charging for each transaction on the other hand are better suited for those who do fewer transactions each year. For fee-based accounts full disclosure of what is covered by the annual fee must be made before the account can be opened. (LO 24.e -Question #12 of 20 - Question ID: 1269882)

(IMPORTANT) For the risk disclosures found in the options disclosure document (ODD), all of the following would be accurate disclosures except A) if a maintenance call is not met, the customer must direct which securities to sell. B) firms can increase their in-house margin requirements without advance notice. C) customers can lose more money than initially deposited. D) customers are not entitled to an extension of time to meet a margin call.

A) if a maintenance call is not met, the customer must direct which securities to sell. If a maintenance call is not met it is the broker-dealer who determines which securities to sell, not the customer. The others are all accurate disclosures found in the ODD. (LO 24.d - Question #11 of 20 - Question ID: 1269884)

Hypothecation is A) the pledging of customer securities as collateral for margin loans. B) the closing of a securities initially position purchased on margin. C) opening a position in a margin account. D) replacing shares that were borrowed to sell short in a margin account.

A) the pledging of customer securities as collateral for margin loans. Hypothecation is agreed to in the margin account agreement. The customer agrees to pledge the securities to be purchased on margin to the broker-dealer so that the broker-dealer can then pledge them to a bank as collateral for the margin loan. (LO 24.b -Question ID: 1269864)

Which of the following accounts can only be opened in a cash account? Individual transfer on death (TOD) account Individual account Individual retirement account (IRA) Individual custodial account A) II and III B) III and IV C) I and IV D) I and II

B) III and IV IRAs and custodial accounts prohibit the use of margin, so they must be done in cash accounts. These other accounts can be cash or margin. (LO 24.a - Question #5 of 20 - Question ID: 1280184)

In which of the following accounts would the use of margin always be prohibited? A) Fiduciary accounts B) Individual retirement accounts C) Partnership accounts D) Corporate accounts

B) Individual retirement accounts Of those listed, only qualified retirement accounts, such as IRAs, prohibit the use of margin. As long as the use of margin is not listed as being restricted, it is allowed in both corporate and partnership accounts, and as long as the use of margin is specifically listed as being allowed, a fiduciary account may do so. (LO 24.b - Question #3 of 20 - Question ID: 1269870)

Which of the following securities can never be purchased on margin? A) Stocks that trade on NASDAQ B) Mutual funds C)Warrants D) OTC stocks

B) Mutual funds Mutual funds can never be purchased on margin. Exchange-traded and NASDAQ stocks and OTC stocks that are on the Federal Reserve Board approved list can be purchased on margin. (LO 24.b -Question #20 of 20 - Question ID: 1280188)

(IMPORTANT) If a customer's Regulation T margin deposit is late, which of the following is true? A) The broker-dealer can apply to the bank where the margin loan originated for an extension. B) The broker-dealer may apply to its designated examining authority (DEA) for an extension. C) The customer may apply to the broker-dealer's designated examining authority (DEA) for an extension. D) The customer can apply to the bank where the margin loan originated for an extension.

B) The broker-dealer may apply to its designated examining authority (DEA) for an extension. Explanation In the event of late margin deposit, requests for extensions are made by the broker-dealer to the firm's designated examining authority (DEA). (LO 24.c -Question #4 of 20 - Question ID: 1269891)

(IMPORTANT) Which of the following securities are most likely deemed marginable by either the Federal Reserve Board (FRB) or regulatory bodies such as Financial Industry Regulatory Authority (FINRA) and the NYSE? A) Exchange-listed stock currently being offered to the public by prospectus B) Treasury bonds C) Listed options that expire in 9 months D) Rights certificates

B) Treasury bonds Explanation Although Treasury securities are exempt from FRB Regulation T, they are OTC securities approved by the FRB as being good collateral for loans. (LO 24.b -Question #14 of 20 - Question ID: 1269855)

(IMPORTANT) A broker-dealer is confronted with margin deposit due but not yet received. The broker-dealer can choose to take no action, neither selling out the securities nor requesting an extension, if the amount due is A) less than the value of the securities purchased. B) less than $1,000. C) less than $4,000. D) $1,000 or more.

B) less than $1,000. Explanation The required deposit will be 50% of the securities' value. If the deposit is late, the broker-dealer can either choose to sell out the securities or request an extension. However, for late deposits of less than $1,000, the broker-dealer can choose to take no action. (LO 24.c -Question #6 of 20 - Question ID: 1269894)

When a broker-dealer pledges customer securities to a bank as collateral for a margin loan, the pledge is known as A) loan consent. B) rehypothecation. C) hypothecation. D) credit agreement.

B) rehypothecation. Explanation By signing the margin agreement, a customer hypothecates (pledges) the securities to the broker-dealer who then rehypothecates (pledges) them to the bank as collateral for the margin loan. (LO 24.b -Question #19 of 20 - Question ID: 1269881)

(IMPORTANT) Which of the following statements is the most correct regarding customer accounts? A) Cash accounts need to be approved by a principal promptly after the first trade. B) Only margin accounts need to be approved by an authorized principal of a broker-dealer. C) A customer may open both a cash and margin account at the same time. D) Hypothecation agreements are required for joint cash accounts only.

C) A customer may open both a cash and margin account at the same time. Customers may open a cash account, margin account, or any other account so long as the firm supports that type of an account and an authorized principal approves it. (LO 24.a -Question #20 of 20 - Question ID: 1269856)

Margin calls can be met with deposits of A) either marginable or non-marginable securities. B) cash only. C) cash or fully paid for marginable securities. D) fully paid for marginable securities only.

C) cash or fully paid for marginable securities. Margin calls can be met using either cash (100% of the call) or fully paid for marginable securities (twice the amount of the call because securities are only marginable to 50% of their value). (LO 24.b -Question #10 of 20 -Question ID: 1269888)

Borrowing money to buy securities is prohibited in all of the following accounts except A) individual retirement account (IRA). B) Roth IRA. C) margin account. D) custodial account. Explanation

C) margin account. Explanation: Borrowing money to buy securities can only be done in a margin account. Retirement accounts and custodial accounts do not allow margin. (LO 24.b - Question #17 of 20 - Question ID: 1269903)

(IMPORTANT) When a client of a broker-dealer purchases stock on margin, in order to finance the loan, the broker-dealer A) lends a portion of the stock to a bank. B) must comply with the requirements of Regulation T. C) rehypothecates the stock to a bank. D) maintains possession of the stock.

C) rehypothecates the stock to a bank. Stock in a client's margin account is hypothecated (pledged) to the broker-dealer. In order to obtain funds to carry the margin loan, the broker-dealer rehypothecates a portion of the stock to a bank. The shares pledged to the bank serve as collateral for the bank's loan to the broker-dealer, which is made in accordance with Regulation U (not T). (LO 24.b -Question #18 of 20 - Question ID: 1269863)

Margin Account

Customers Borrow Cash (REG T - 50%.)

A client opens a new margin account and, as the initial trade, purchases 300 shares of MS Corporation common stock at $10 per share. The firm would send the client a margin call for A) $1,000. B) $3,000. C)$1,500. D) $2,000.

D) $2,000. No credit may be extended in a new margin account with less than $2,000 in equity. This purchase of $3,000 of stock would normally require 50% payment ($1,500) in accordance with Regulation T, but because it is the initial trade in the account, the $2,000 minimum must be met. (LO 24.b - Question #5 of 20 - Question ID: 1269885)

A Financial Industry Regulatory Authority (FINRA) maintenance call will occur in a long margin account if the equity drops below A) 35% or $2,500. B) 50% or $2,500. C) 30% or $2,000. D) 25% or $2,000.

D) 25% or $2,000. Explanation In a long margin account, equity must be maintained at 25% or $2,000, whichever is greater. (LO 24.d -Question ID: 1293887)

Regarding the Regulation T requirement, which of the following is true? A) It is currently 30% and must remain unchanged unless mandated by Congress. B) It is currently 25% but can be changed at any time by the FRB. C) It is currently 50% and must remain unchanged unless mandated by Congress. D) It is currently 50% but can be changed at any time by the Federal Reserve Board (FRB).

D) It is currently 50% but can be changed at any time by the Federal Reserve Board (FRB). The Regulation T initial margin requirement is currently 50%. While it has been so for many decades, it can be changed by the Federal Reserve Board anytime it deems appropriate to do so. (LO 24.b- Question #16 of 20 - Question ID: 1269876)

(IMPORTANT) A partnership account wants to trade on margin. When would this be permitted? A) Only if it is specifically stated as being permitted in the partnership resolution B) Always C) Never D) Only if it is not restricted from doing so in the partnership resolution

D) Only if it is not restricted from doing so in the partnership resolution A partnership account will be allowed to trade on margin as long as there are no restrictions against doing so in the partnership resolution. This is the same standard used for corporate accounts. (LO 24.b -Question #13 of 20 - Question ID: 1269868)

Which of the following transactions, if any, cannot be done in a cash account? A) Buy 100 ABC to open B) Any of these could be done in a cash account C) Buy 100 ABC to close D) Sell 100 ABC to open

D) Sell 100 ABC to open Explanation Selling to open (a short sell) can only be done in a margin account. It cannot be done in a cash account. (LO 24.a - Question #1 of 20 - Question ID: 1280185)

(IMPORTANT) Which of the following securities is exempt from the Regulation T margin requirements but still subject to an initial margin requirement as determined by the broker-dealer? A) Rights B) Mutual funds C) Options D) T-notes

D) T-notes While Treasury securities (bills, notes, and bonds) are exempt from Regulation T margin requirements, purchases of them on margin are allowed and would be subject to the firm's determination of what the initial margin deposit requirement should be. (LO 24.b -Question #12 of 20 - Question ID: 1269874)

All of the following statements about securities purchases are true except: A) in a short margin account, customers borrow securities for short sales. B) in a cash account, the customer pays in full for securities. C) in a long margin account, customers borrow money for securities purchases. D) securities may not be purchased with borrowed money.

D) securities may not be purchased with borrowed money. Borrowing is a perfectly acceptable practice when buying and selling securities, whether it is cash that is borrowed for purchases or securities that are borrowed, chiefly from other investors who have signed a loan consent agreement, allowing their securities to be borrowed for short sales. (LO 24.b -Question #6 of 20 -Question ID: 1269862)

Consent to loan agreement

Gives permission for short sellers to take your stock as a loan and sell it, while putting the proceeds into your account. This form is not REQUIRED.

Corporate and Partnership Accounts (Can have margin if?)

If no restrictions are stated against doing so in Partnership/corporate Resolution. A partnership account will be allowed to trade on margin as long as there are no restrictions against doing so in the partnership resolution. This is the same standard used for corporate accounts.

Margin Maintenance Requirements are Set by who?

Margin Maintenance Requirements are set by FINRA (NOT FRB) or the Exchange. Long Accounts are 25% and Short Accounts are 30%

Hypothecation

Pledging of customer securities as collateral for margin loans.

If someone wants to buy $0-$1999 of stock in Margin Account, what is the Minimum?

Purchase Price

Regulation T

Regulates extension of credit to customers by broker/dealers.

Regulation U

Regulates the extension of credit from BANKS to Customers (Broker Dealers)

Margin Account Forms Required vs Optional?

Required: Credit Agreement: Terms of Credit extended by BD Hypothecation Agreement: Allows securities to be pledged as a loan. Optional: Consent to Loan Agreement: Gives permission for firm to allow short sellers take your stock as a loan and sell it, while putting the proceeds into your account.

Regulation T margin rule

Settlement plus two additional business days. The rule requires that the call be met within two business days of the settlement date, referred to as S+2. If regular way settlement was T+2, adding two additional business days to the trade date would be T+4.

Credit agreement (part of margin agreement)

The "credit agreement" discloses the terms of the credit extended by the broker/dealer, including the method of interest computation and situations under which interest rates may change.

Which type of account fee structure is typically better for the buy and hold investor? A) A commission-based account B) A broad-based account C) A narrow-based account D) A fee-based account

With a fee-based account, the customer is charged a fixed fee regardless of the number of trades. With a commission-based account, the customer is charged a fee for each trade. If the customer follows a buy and hold strategy, she typically won't be doing enough trades for the fee-based account to save herself money. Broad- and narrow-based are not types of accounts, but rather a reference to types of index funds. (LO 24.e -Question #8 of 20 - Question ID: 1269913)

Hypothecation Agreement

gives permission to the broker/dealer to pledge customer margin securities as collateral. Typically, BD will not use own cash for margin purchases,