Margin Account

If the equity in a margin account falls below the maintenance requirement, the customer will:

1. A.Receive a maintenance margin callCorrect - a call to restore equity.
2. B.Have the account closed with no noticeThere is a real fact underneath this: a firm can sell out positions when a call goes unmet. But liquidation is the remedy that follows the call, not a replacement for it. The customer is notified and given the chance to deposit first.
3. C.Receive a dividendDividends are paid out of the issuer's earnings and are unrelated to the equity level in a margin account. This choice has cash flowing into the account, while the deficiency in the stem requires cash flowing in from the customer.
4. D.Owe nothingOwing nothing describes an account still sitting above its maintenance requirement. The stem stipulates that equity has already fallen below it, so a deficiency exists by definition and something must cure it.

Why: Falling below maintenance margin triggers a maintenance (margin) call to deposit additional funds or securities.

To open a cash account for a partnership, a broker-dealer should obtain the:

1. A.Personal guarantees from each partner's spouseSpousal guarantees are not account-opening documents for any entity type.
2. B.A trust agreement executed by all partnersA trust agreement governs trust accounts; partnerships are documented by their partnership agreement.
3. C.Partnership agreement identifying which partners may transact for the accountCorrect - the partnership agreement is the governing document establishing trading authority.
4. D.Corporate charter and bylawsThose documents govern corporations, not partnerships.

Why: The partnership agreement establishes the entity and identifies which partners are authorized to transact for the account. For a margin account the firm would also confirm the agreement does not prohibit margin. The clue is matching the entity type to its governing document.

Thackston Meridian Pension Trust opens an institutional account at Corvale Fenn Securities and instructs that it be operated on a DELIVERY VERSUS PAYMENT basis. Its custodian bank, not the broker-dealer, will hold the assets. A new operations clerk asks what practical difference this makes to how the trust's purchases settle.

1. A.The broker-dealer extends credit to the trust, which pays for the securities after they have been delivered.No credit is involved. Payment and delivery occur simultaneously, which is the entire point of the arrangement.
2. B.Securities and payment are exchanged simultaneously between the broker-dealer and the trust's custodian bank.Correct. The custodian pays only against receipt of the securities, eliminating the risk that one side performs and the other does not.
3. C.The custodian bank gains discretionary authority to approve each purchase before it settles.DVP is a settlement mechanism and confers no investment discretion on the custodian.
4. D.Settlement is deferred until the end of the month, when all of the trust's trades are netted and settled together.There is no monthly netting. Each trade settles individually on its settlement date, against payment.

Why: In a delivery versus payment arrangement, the broker-dealer executes the trade but the securities and the money move between the broker-dealer and the customer's own CUSTODIAN BANK, simultaneously and against each other, rather than into an account the broker-dealer maintains for the customer. On a purchase the custodian pays only upon receiving the securities; on a sale, the mirror image, receive versus payment, means the custodian releases the securities only upon receiving the money. The point of the arrangement is to eliminate the risk that one side performs and the other does not, and it lets an institution keep all of its assets consolidated at a single custodian while trading through many brokers. It is an institutional settlement mechanism, not a form of margin or discretion.

A customer wanting to use leverage to buy stock uses:

1. A.A cash accountA cash account demands full payment for every purchase, so nothing is borrowed and no leverage exists. It is the direct opposite of what this customer is asking for.
2. B.A margin accountCorrect - margin provides leverage.
3. C.An IRARetirement accounts cannot engage in the borrowing that leverage requires, and pledging the assets would put the account's tax treatment at risk. The tax shelter comes at the price of margin.
4. D.A 529 planA 529 is an education savings vehicle offering a fixed menu of investment options, not a brokerage account for buying individual stocks. Neither the leverage nor the stock purchase is available within it.

Why: A margin account lets a customer borrow to buy securities.