FINRA Series 7Opens Accounts and Evaluates Customer ProfileMedium
A margin customer signs an agreement permitting the broker-dealer to lend the customer's margin securities to other customers or broker-dealers, such as for short sale delivery. This authorization is contained in which document?
- AThe loan consent agreement
- BThe new account application
- CThe hypothecation agreement
- DThe credit agreement
Show answer & explanationAnswer & explanation
Correct answer: A. The loan consent agreement
The loan consent agreement, which is optional and separate from the required hypothecation agreement, specifically authorizes the broker-dealer to lend the customer's margined securities to other parties, such as for short sales. Hypothecation only allows pledging securities to a bank as collateral for the broker's own loan.
Why the other options are wrong
- B. The new account form documents general KYC data, not margin-specific lending authority.
- C. Hypothecation allows the firm to pledge customer securities to a bank, not to lend them to other customers.
- D. The credit agreement sets interest rates and terms of the margin loan, not lending of securities to third parties.
Loan Consent Agreement
An optional margin account document authorizing the broker-dealer to lend the customer's margined securities to other customers or firms.
- One of three margin agreement components: credit, hypothecation, loan consent
- Only loan consent is optional
- Distinct from hypothecation, which pledges securities to a bank
Memory trick: Credit sets terms, Hypothecation pledges to bank, Loan consent lends to others.