Special Account Types

Investment advisers work with various account types that have unique features, risks, and regulatory requirements. Understanding these distinctions is critical for both suitability and compliance.

Margin Accounts

A margin account allows investors to borrow money from their broker-dealer to purchase securities. The securities in the account serve as collateral for the loan.

Regulation T (Federal Reserve Board)

Regulation T governs the extension of credit by broker-dealers to customers for securities purchases:

Example: To purchase $10,000 of stock on margin, an investor must deposit at least $5,000 (50%) and can borrow the remaining $5,000.

FINRA Maintenance Requirements

After the initial purchase, FINRA requires ongoing minimum equity:

Margin Calls

When account equity falls below the maintenance requirement:

1. Margin Call Issued - Broker demands additional funds or securities
2. Meeting the Call - Investor must deposit cash or marginable securities
3. Forced Liquidation - If not met, broker can sell securities without consent

On the Exam: Know that Regulation T sets the 50% initial margin, while FINRA sets the 25% maintenance minimum. Firms can require higher amounts but never lower.

Margin Account Risks

Fee-Based vs. Commission-Based Accounts

Fee-Based Accounts

An asset-based fee is charged as a percentage of assets under management (AUM):

Commission-Based Accounts

Compensation is transaction-based:

Suitability Considerations

Discretionary vs. Non-Discretionary Accounts

Discretionary Accounts

The adviser has written authorization to make investment decisions without prior client approval for each transaction:

Non-Discretionary Accounts

The adviser must obtain client approval before each transaction:

On the Exam: Discretionary authority covers investment decisions (what to buy/sell). It does NOT give authority to withdraw money or change beneficiaries—those require separate authorization.

Wrap Fee Programs

A wrap fee program bundles multiple services for a single, all-inclusive fee.

What's Included in Wrap Fees

Wrap Fee Ranges

Typical wrap fees range from 1% to 3% of assets, depending on services and account size.

Form ADV Part 2A Appendix 1

SEC rules require wrap fee programs to provide a separate disclosure brochure (Appendix 1) that includes:

• Description of services provided
• Fees and how they are calculated
• Conflicts of interest
• Information about participating managers

Wrap Fee Suitability

Options Accounts

Options accounts require additional disclosures and suitability determinations:

Account Requirements

1. Options Agreement - Client must sign
2. Options Disclosure Document (ODD) - Must be delivered
3. Suitability Review - Assess experience and risk tolerance
4. Approval Levels - Increasing levels for more complex strategies

Approval Levels (Typical Structure)

Key Takeaways

1. Reg T requires 50% initial margin; FINRA requires 25% maintenance minimum
2. Fee-based accounts charge AUM percentage; commission accounts charge per trade
3. Discretionary authority requires written authorization and covers investment decisions only
4. Wrap fees bundle services for 1-3% of assets—appropriate for active traders
5. Options accounts require tiered approval based on experience and strategy complexity