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Question

Difficulty: MediumMargin Accounts and Borrowing Requirements

A retail client is opening a new margin account with a broker-dealer. Which of the following agreements or disclosures is optional for the client to sign?

  1. A
    Credit Agreement
  2. Loan Consent AgreementAnswer
  3. C
    Hypothecation Agreement
  4. D
    Margin Risk Disclosure Document

Answer

The Loan Consent Agreement is optional for a customer opening a margin account.
When establishing a margin account, customers are required to sign the Credit Agreement (disclosing interest terms and rate calculations) and the Hypothecation Agreement (pledging securities as collateral for the loan). Additionally, broker-dealers must provide a Margin Risk Disclosure Document. However, the Loan Consent Agreement—which grants the broker-dealer permission to lend out customer securities to third parties for short selling—is entirely optional.

Step-by-Step Solution

1
Identify the standard account documentation required for establishing a margin account under FINRA and SEC rules.
The mandatory requirements include signing the Credit Agreement and the Hypothecation Agreement, as well as delivering the Margin Risk Disclosure Document.
The Credit Agreement specifies margin interest terms and the Hypothecation Agreement pledges customer securities as loan collateral.
2
Evaluate the legal requirement for the Loan Consent Agreement.
The Loan Consent Agreement permits the broker-dealer to lend out fully paid or margin securities to other market participants for short selling.
Because lending customer securities is not strictly necessary for extending credit to the customer, signing this agreement is optional.

Key Concept

Margin Account Documentation Requirements
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Topics

Margin Accounts and Borrowing Requirements