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CLAIMS AGAINST SECURITIES BROKERS AND INVESTMENT ADVISERS  |
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In a margin account the broker lends the customer money to buy securities. The broker holds the securities as collateral for the loan. Margin increases an investor's risk. The greater the percentage of the account's value that is a loan, the greater the risk. The broker must disclose the interest rate and other terms and conditions of the loan. The broker must also disclose under what circumstances and when securities in the account will be sold to cover the loan. The broker must give a monthly accounting of all transactions in the account and all interest, advances and charges. Regulation T of the Federal Reserve regulates margin. Only certain securities are eligible for margin purchases. The Regulation limits margin to 50% of the value of the securities purchased. For most securities it applies only to the time credit is extended (initial margin). It does not apply after that as the value of the security fluctuates (maintenance margin). The NASD and certain stock exchanges impose maintenance margin rules that limit the loan balance to 75% of the value of the security. Brokerage firms impose their own margin requirements. Failure to meet them can result in sale of the securities held as collateral to pay the loan. When and under what circumstances this can happen must be spelled out in the margin agreement with the customer. These agreements often provide that the margin requirements can be charged without notice. However, representatives of the brokerage firm orally, through the registered representative or in its sales literature, or otherwise, can limit that right of the firm. Failure to fully inform the customer of margin risks can result in liability for any losses caused as a result. A margin disclosure statement in a form set forth by NASD rule must be given to the customer when an account is opened and each year. If the customer is inexperienced and unsophisticated, additional disclosures may be in order and, in some cases, use of any margin may be unsuitable for the customer.
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Donald M.
Thompson * 55 W. Monroe #3950; Chicago, IL 60603 |
