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Difficulty: HardFederal Reserve Board (FRB) and Margin Regulation

A broker-dealer customer wants to purchase shares of a newly formed corporate entity that completed its Initial Public Offering (IPO) 15 days ago. The customer asks to purchase the shares on margin in their existing margin account. Under Federal Reserve Board (FRB) Regulation T rules, how should the broker-dealer handle this request?

  1. The purchase may be executed in the margin account, but the customer must deposit 100% of the purchase price because the security is non-marginable for 30 days following its issuance.Answer
  2. B
    The trade must be rejected completely because non-marginable securities are legally prohibited from being held inside a customer margin account.
  3. C
    The customer may purchase the security on 50% initial margin provided the Federal Reserve Board issues a custom monetary policy waiver for the underwriting syndicate.
  4. D
    The customer can borrow up to 50% of the purchase price under Regulation T because FINRA, as the primary federal enforcement SRO, automatically waives margin restrictions after 10 trading days.

Answer

The purchase may be executed in the margin account, but the customer must deposit 100% of the purchase price because the security is non-marginable for 30 days following its issuance.
Under Federal Reserve Board Regulation T, new issues of corporate securities resulting from an initial public offering (IPO) are strictly non-marginable for the first 30 days following the effective date. Investors are allowed to execute the transaction inside a margin account, but because the loan value of the newly issued security is 0%, the customer must deposit 100% of the purchase price.

Step-by-Step Solution

1
Identify the regulatory body and specific rule governing marginability of new issues.
Federal Reserve Board Regulation T governs initial credit extended by broker-dealers to customers.
FRB establishes initial margin requirements and determines margin eligibility parameters for public offerings.
2
Evaluate the 30-day seasoning requirement for IPOs under Regulation T.
Securities from a newly issued IPO cannot be purchased on margin (cannot extend loan value) until 30 calendar days post-issuance.
This prevents speculative leveraged purchasing during the initial market distribution phase.
3
Determine account operational requirements when buying a non-marginable security in a margin account.
The purchase is permitted in the margin account, but requires a 100% cash equity deposit by the customer.
Non-marginable status means zero collateral credit value, not a prohibition against custody within the account.

Key Concept

Regulation T 30-Day Seasoning Rule for New Issues / IPO Marginability
Estimated Time:1m 30s
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Topics

Federal Reserve Board (FRB) and Margin Regulation

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