An investor with a newly established margin account wishes to purchase shares of an open-end mutual fund that completed its initial public offering 15 days ago. According to Federal Reserve Regulation T and federal securities regulations, what is the initial margin requirement for this purchase?
- 100% of the purchase price, because new issue securities cannot be purchased on margin until they have been seasoned for 30 days.Answer
- B50% of the purchase price, provided the investor satisfies the standard $2,000 FINRA initial equity requirement.
- C25% of the purchase price, matching FINRA's standard minimum maintenance requirement for long positions.
- D0% required, because open-end mutual funds are classified as exempt securities under Federal Reserve regulations.
Answer
100% of the purchase price, because new issue securities cannot be purchased on margin until they have been seasoned for 30 days.
Under Section 11(d)(1) of the Securities Exchange Act of 1934 and Regulation T, new issues—including open-end investment company (mutual fund) shares—are restricted from being purchased on credit or pledged as collateral for margin loans until 30 days have elapsed from the date of issuance. Consequently, an investor purchasing mutual fund shares within 15 days of offering must deposit 100% of the purchase price in cash.
Step-by-Step Solution
Key Concept
Marginability of New Issues and Mutual Funds under Regulation T