Study guide
Margin lending, trade corrections, customer reporting, and regulatory recordkeeping form the daily operational core of a broker-dealer. This chapter covers how credit is extended and policed under Regulation T and FINRA rules, how errors and short sales are handled, what customers must receive on paper, and the financial reports and records regulators expect to find in order.
Regulation T, Cash Accounts, and Initial Margin
Regulation T, issued by the Federal Reserve Board, governs how much credit a broker-dealer may extend when a customer buys securities. In a margin account, the initial requirement for most equity securities is 50 percent of the purchase price; the customer deposits half and the firm lends the rest, charging interest on the debit balance. In a cash account, the customer must pay in full. Payment is due within the Reg T payment period, defined as the standard settlement cycle plus two business days; if payment does not arrive, the firm must either obtain an extension from its designated examining authority or cancel or liquidate the position, and after liquidation for nonpayment the account is frozen for 90 days, meaning purchases require cash up front. Freeriding, buying and selling a security in a cash account without ever depositing the money to pay for the original purchase, triggers the same 90-day freeze. FINRA Rule 4210 adds a minimum equity requirement: a margin account generally needs 2,000 dollars of equity, or full payment if the purchase costs less than 2,000 dollars, before the firm may extend credit. Some products are not marginable at all, such as most new issues for the first 30 days, and options buyers must pay premiums in full. When Tomas, a margin clerk, sees a cash-account customer sell stock two days after buying it with no funds ever received, he recognizes a freeride and applies the freeze rather than waiting for a payment that is not coming.
Maintenance Margin, Margin Calls, Day Trading, and Stock Loan
After a position is established, FINRA maintenance margin takes over. Equity in a margin account must stay at or above 25 percent of the market value of long positions and 30 percent for most short equity positions, and firms nearly always impose stricter house requirements. If equity falls below the maintenance level, the firm issues a maintenance call, which the customer meets by depositing cash or securities or by liquidating positions; a firm can sell out a customer who does not respond. Maintenance calls differ from Reg T calls, which arise from the initial purchase, and operations must track both. Day trading has its own regime, and it changed recently. For years, FINRA Rule 4210 designated as a pattern day trader any customer who executed four or more day trades within five business days, where those trades were more than 6 percent of total trading activity in that period; a pattern day trader had to maintain minimum equity of 25,000 dollars, and day-trading buying power was limited to four times the maintenance margin excess as of the close of the prior day. Effective June 4, 2026, FINRA replaced that framework in its entirety: the pattern day trader designation, the 25,000 dollar minimum, and the prior-day buying power limit were eliminated in favor of intraday margin requirements based on the account's real-time intraday margin excess, with firms permitted to phase in the new approach into late 2027. The standard 2,000 dollar minimum equity for margin accounts still applies. Related to margin is the stock loan desk, which borrows and lends securities, typically against collateral of about 102 percent of market value, marked to market daily. Stock loan supports short selling, and Regulation SHO Rule 203 requires that before accepting or effecting a short sale in an equity security, a firm must locate the security, meaning have reasonable grounds to believe it can be borrowed and delivered by settlement, with limited exceptions such as bona fide market making.
Trade Corrections, As-Of Trades, Error Accounts, and Prohibited Practices
Mistakes happen: a buy entered as a sell, the wrong account number, the wrong quantity. What matters to regulators is how corrections are controlled. A trade moved out of a customer account goes into a designated firm error account, is documented with the reason for the error, and is reviewed and approved by a principal; the firm, not the customer, absorbs losses from firm errors. A cancel and rebill, which moves a trade from one account to another, requires supervisory approval and a documented reason, because rebills between unrelated customer accounts are a classic mechanism for hiding unauthorized trading or shifting profitable trades to favored accounts. An as-of trade is one recorded on a date after it actually occurred, booked as of the true trade date; a scattering of as-of entries is normal operational cleanup, but a pattern of them can signal reporting breakdowns or deliberate backdating and should be escalated. Operations professionals are also expected to recognize prohibited trading practices even though they do not trade. Parking is hiding ownership of securities in another party's account to evade rules. Adjusted trading is selling a security to a counterparty at an inflated price while buying something else back at an offsetting inflated price to conceal a loss. Marking the close means trading late in the day to manipulate the closing price, and front running means trading ahead of a known customer or firm order. When Renee in trade support is asked to rebill a losing trade from a representative's personal account into a customer account, the correct answer is refusal and immediate escalation.
Confirmations, Statements, Corporate Actions, and Tax Reporting
SEA Rule 10b-10 requires a written or electronic confirmation at or before completion of each transaction, disclosing the security, price, quantity, capacity in which the firm acted, agency or principal, and commission or markup information as applicable. Account statements must be sent at least quarterly under FINRA rules, and in practice monthly whenever there is activity, showing positions, balances, and transactions. Corporate actions are a major operations workload. For a cash dividend, the issuer sets a declaration date, a record date, and a payable date; the ex-dividend date, the first day a buyer is not entitled to the dividend, is set by the market and under T+1 settlement generally falls on the same business day as the record date, because a trade must settle by record date for the buyer to be an owner of record. When securities are sold close to record date or transfers are delayed, due bills attach so the dividend follows the party entitled to it, and dividend claims between firms clean up whatever slips through. Mandatory actions such as splits and mergers are booked to all holders automatically, while voluntary actions such as tender offers require capturing each customer's election by the deadline, one of the least forgiving deadlines in operations. On the tax side, firms issue Form 1099-B for sales proceeds, 1099-DIV for dividends, and 1099-INT for interest, and for covered securities the firm must also report adjusted cost basis and holding period, applying customer lot-selection instructions and adjusting for wash sales in identical securities within the same account.
Net Capital, FOCUS Reports, and Books and Records
Two financial responsibility pillars sit behind everything else. SEA Rule 15c3-1, the net capital rule, requires a broker-dealer to maintain minimum liquid capital at all times, computed by taking net worth, subtracting illiquid assets, and applying haircuts, percentage deductions reflecting market risk, to securities positions; aged fails and unresolved differences also generate charges, which is how sloppy operations directly burns capital. Firms report their financial condition on FOCUS reports, filed monthly or quarterly depending on the firm's business, and a firm approaching early warning capital levels faces heightened notification duties and business restrictions. Recordkeeping is governed by SEA Rules 17a-3 and 17a-4: 17a-3 says what records must be created, including blotters of each day's purchases, sales, receipts, and deliveries, general ledgers, stock records, order tickets, and customer account records, while 17a-4 says how long to keep them. The broad pattern to memorize: core financial records such as blotters, ledgers, and the stock record are kept six years, the first two in an easily accessible place; most other records, including order tickets, confirmations, and business communications, are kept three years; and organizational documents such as articles of incorporation and minute books are kept for the life of the firm. Electronic records must be preserved in a non-rewriteable, non-erasable format or, under amendments adopted in recent years, with a compliant audit-trail alternative. Daily and periodic reconciliations, bank accounts, depository positions, suspense accounts, tie the records to reality, and an unreconciled difference that lingers is both a capital problem and an audit finding.
Key terms
- Regulation T
- — The Federal Reserve rule governing broker-dealer credit, setting a 50 percent initial margin requirement on most equity purchases and payment deadlines for cash accounts.
- Maintenance margin
- — The FINRA Rule 4210 minimum equity that must be maintained after purchase, generally 25 percent of long market value and 30 percent for most short equity positions.
- Pattern day trader
- — The former FINRA Rule 4210 designation for a customer executing four or more day trades in five business days exceeding 6 percent of trading activity; the designation and its 25,000 dollar minimum equity requirement were replaced by intraday margin requirements effective June 4, 2026.
- Day-trading buying power
- — Formerly, the maximum a pattern day trader could commit intraday, limited to four times the maintenance margin excess as of the prior day's close; replaced in June 2026 by limits based on real-time intraday margin excess.
- Locate requirement
- — The Regulation SHO Rule 203 duty to have reasonable grounds, before effecting a short sale, to believe the security can be borrowed and delivered by settlement.
- As-of trade
- — A trade recorded on a later date but booked as of its actual earlier trade date; a pattern of as-of entries is a supervisory red flag.
- Error account
- — A designated firm account holding trades resulting from firm mistakes, with documented reasons and principal review, so errors are never absorbed silently by customers.
- Trade confirmation (Rule 10b-10)
- — The disclosure document due at or before completion of each transaction, showing security, price, quantity, the firm's capacity, and compensation details.
- Ex-dividend date
- — The first date a buyer is not entitled to a declared dividend; under T+1 settlement it generally coincides with the record date.
- Due bill
- — An instrument attached to a delivery ensuring a dividend or distribution is passed to the party entitled to it when transfers straddle the record date.
- Net capital rule (SEA 15c3-1)
- — The requirement that a broker-dealer maintain minimum liquid capital at all times, computed with haircuts on positions and charges for items like aged fails.
- FOCUS report
- — The Financial and Operational Combined Uniform Single report through which broker-dealers file their financial and operational condition with regulators, monthly or quarterly.
Exam tips
- Keep the margin numbers straight: Reg T initial is 50 percent, FINRA maintenance is 25 percent long and 30 percent short, and minimum equity for a margin account is 2,000 dollars.
- Know the day-trading transition: the old pattern day trader thresholds, 25,000 dollar minimum equity and buying power of four times prior-day maintenance margin excess, were replaced effective June 4, 2026 by intraday margin requirements based on real-time intraday margin excess.
- A locate is required before the short sale is effected, not by settlement; do not confuse the Rule 203 locate with the Rule 204 close-out.
- For recordkeeping, think in three buckets: six years for blotters, ledgers, and the stock record; three years for most other records like order tickets and communications; life of the firm for organizational documents.
- Corrections questions reward process: rebills and error-account entries need documented reasons and principal approval, and losses from firm errors belong to the firm.