12.2 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 and FINRA Margin Basics

Regulation T (Federal Reserve Board) governs the extension of credit by broker-dealers to customers for securities purchases; FINRA Rule 4210 adds minimum equity and maintenance requirements:

Initial Margin (Reg T): 50% of purchase price

Minimum Account Equity (FINRA): $2,000

Day Trading (FINRA): Intraday margin standards replaced the $25,000 pattern day trader minimum on June 4, 2026 (firm phase-in to October 20, 2027)

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:

Long Positions: 25% of market value

Short Positions: 30% of market value (FINRA)

Firm Requirements: Often 30-40% (higher than FINRA minimum)

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

Amplified Losses: Losses magnified beyond original investment

Interest Costs: Ongoing charges on borrowed funds

Forced Liquidation: Securities sold without consent

No Time Extension: Firms can demand immediate payment

Fee-Based vs. Commission-Based Accounts

Fee-Based Accounts

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

Fee Structure: Typically 0.5% - 2% of AUM annually

Alignment: Adviser benefits when assets grow

Best For: Active traders, ongoing advice

Conflicts: May incentivize keeping assets invested

Commission-Based Accounts

Compensation is transaction-based:

Fee Structure: Per-trade commissions

Best For: Buy-and-hold investors, infrequent trades

Conflicts: May incentivize excessive trading (churning)

Advantage: No ongoing fees if account is inactive

Suitability Considerations

Fee-Based: Suitable When - Frequent trading, ongoing advice needed

Commission-Based: Suitable When - Infrequent trading, self-directed investors

Discretionary vs. Non-Discretionary Accounts

Discretionary Accounts

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

Written Authorization: Must be signed by client

Trading Authority: Can determine what, when, and how much to buy/sell

Fiduciary Duty: Higher level of responsibility

Cannot Determine: Adviser cannot authorize withdrawals

Non-Discretionary Accounts

The adviser must obtain client approval before each transaction:

Authority: Recommendations only

Execution: Client must approve each trade

Control: Client maintains full control

Suitability: Still must be suitable

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

Investment Advice: Yes

Trade Execution: Yes

Custody Services: Yes

Administrative Fees: Yes

Manager Selection: Often included

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

Appropriate For: Active traders; Those wanting bundled services; Clients needing ongoing advice; Those preferring fee predictability

Not Appropriate For: Buy-and-hold investors; Those needing minimal service; Self-directed investors; Cost-sensitive inactive accounts

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)

Level 1: Covered calls, protective puts

Level 2: Long calls and puts

Level 3: Spreads

Level 4: Uncovered (naked) writing

Level 5: Uncovered index options

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