A retail client opens a new margin account and asks a registered representative about buying shares of open-end mutual funds and exchange-traded funds (ETFs) using margin leverage. Which of the following statements accurately describes the margin eligibility of these securities under Federal Reserve Board Regulation T?
- Exchange-traded fund shares may be purchased on margin immediately, whereas open-end mutual fund shares cannot be purchased on margin but may be used as collateral after being held fully paid for 30 days.Answer
- BBoth open-end mutual fund shares and exchange-traded fund shares may be purchased on margin immediately, subject to a standard 50% initial equity deposit requirement.
- COpen-end mutual fund shares may be purchased on margin immediately, but exchange-traded fund shares cannot be bought on margin until held fully paid for 30 days.
- DNeither open-end mutual fund shares nor exchange-traded fund shares can ever be used as collateral or traded in a margin account under any circumstances.
Answer
Exchange-traded fund (ETF) shares may be purchased on margin immediately, whereas open-end mutual fund shares cannot be purchased on margin but may be used as collateral after being held fully paid for 30 days.
Under Federal Reserve Board Regulation T and SEC rules, continuous primary offerings of investment company shares—such as open-end mutual funds—cannot be purchased on margin. Investors must pay 100% of the purchase price. However, once mutual fund shares have been held fully paid for at least 30 days, they are considered seasoned and can be used as collateral in a margin account. In contrast, ETFs trade in the secondary market on exchanges and can be purchased on margin immediately.
Step-by-Step Solution
Key Concept
Regulation T Marginability of Open-End Funds vs. Exchange-Traded Funds
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