FINRA Series 7Processes and Confirms TransactionsHard
A customer's margin account shows a long market value of $10,000 and a debit balance of $6,000, resulting in equity of $4,000. Because equity is below the 50% Reg T requirement, the account is restricted. The customer then sells $2,000 worth of stock from this account. Under the retention requirement for restricted accounts, how much of the sale proceeds must be applied to reduce the debit balance?
- A$2,000
- B$1,000
- C$1,500
- D$500
Show answer & explanationAnswer & explanation
Correct answer: B. $1,000
In a restricted account, FINRA/NYSE rules require that 50% of the proceeds from any sale be retained and applied to reduce the debit balance. Here, 50% of the $2,000 sale = $1,000 must be applied to the debit; the remaining $1,000 becomes available in SMA.
Why the other options are wrong
- A. Retaining the full proceeds is not required; only the 50% retention requirement applies.
- C. $1,500 does not correspond to the 50% retention calculation ($2,000 × 50% = $1,000).
- D. $500 understates the required 50% retention amount.
Restricted Account Retention Requirement
When a margin account's equity falls below the 50% Reg T requirement, the account becomes 'restricted,' and 50% of any sale proceeds must be applied to reduce the debit balance (retention requirement).
- Restricted status triggered when equity < 50% of market value
- 50% of sale proceeds must reduce debit
- Remaining 50% becomes available SMA
Memory trick: Restricted = Retain half of every sale to pay down the loan.