Customer Accounts: Types and Requirements
About This Lesson
Customer accounts generate a heavy share of SIE questions, usually framed as "which account fits this customer" or "is this allowed." The two areas that carry the most weight are the different account types and ownership structures, and the mechanics of a margin account, where the numbers and the rules both get tested.
What you'll cover
- Account types: cash, margin, options, discretionary, and fee-based
- Ownership and registration: individual, joint (JTWROS and TIC), trust, and custodial
- What a firm must collect to open an account, and the extra steps by account type
- Margin mechanics: Regulation T, equity, maintenance requirements, and margin calls
- Short selling, non-marginable securities, and the minimum to open a margin account
Two reflexes worth building now: discretion over what, how much, or whether to trade needs written authorization (picking only the time or price does not), and JTWROS passes a deceased owner's share to the survivors while TIC sends it to the estate.
Account Types
The first thing a new account establishes is how the customer will pay and what the firm is allowed to do on their behalf. A handful of account types cover almost everything the exam asks about.
- Cash account: the customer pays in full for every purchase. No borrowing, and the simplest, most common type.
- Margin account: the customer can borrow part of the purchase price from the broker-dealer, using the securities as collateral. It is governed by the Federal Reserve's Regulation T, covered in detail later in this chapter.
- Options account: requires separate approval, delivery of the Options Disclosure Document (ODD), and a signed options agreement, because options carry risks a plain stock account does not.
- Discretionary account: the customer gives the broker written authority to trade without checking in on each order. That written authorization is the defining requirement.
Fee-based vs. commission
Accounts also differ in how the firm charges. A commission account bills per transaction, which suits a buy-and-hold investor who trades rarely. A fee-based account (such as a wrap account) charges a flat fee or a percentage of assets instead, which tends to fit a more active investor. Matching the pricing to how often the customer trades is a common suitability point.
| Cash Account | Margin Account | Options Account | UGMA/UTMA Custodial | |
|---|---|---|---|---|
| Pay in full? | Yes, full payment | No, 50% Reg T | Yes, premiums paid in full | Yes |
| Can borrow? | No | Yes, up to 50% | No (cash account for options) | No |
| Short selling allowed? | No | Yes | No (requires margin) | No |
| Special agreements required | New account form | Margin agreement + hypothecation agreement | Options agreement (signed within 15 days); ODD delivered | Custodian designated; minor's SSN |
| Who controls trading? | Account owner | Account owner | Account owner (ROP approval) | Custodian only, not the minor |
| Gift/irrevocable? | No | No | No | Yes, irrevocable gift to minor |
| Can minor access funds? | N/A | N/A | N/A | At age of majority (18 or 21 by state) |
| Margin calls possible? | No | Yes | No | No |
| Free-riding violation possible? | Yes, 90-day freeze | No | Yes | Yes |
UGMA/UTMA exam traps: (1) Only ONE custodian and ONE minor per account. (2) The gift is irrevocable: assets cannot be returned to the donor. (3) The custodian controls the account, not the minor. (4) No margin or naked options in custodial accounts.
A customer gives their broker the authority to buy 500 shares of XYZ stock, but lets the broker decide when to execute the trade. Is this considered a discretionary order?
Account Ownership and Registration
Ownership, also called the account registration, determines who controls the assets and, importantly for the exam, what happens to them when an owner dies.
Individual and joint accounts
An individual account has a single owner. A joint account has two or more, and the form of joint registration decides where a deceased owner's share goes:
- Joint Tenants with Right of Survivorship (JTWROS): when one owner dies, that share passes directly to the surviving owner(s) and bypasses probate. Each owner holds an equal, undivided interest, which is why this is the common choice for spouses.
- Tenants in Common (TIC): when one owner dies, that share goes to their estate rather than to the other owners, and ownership percentages can be unequal.
Trust accounts
A trust account is managed by a trustee for the benefit of a beneficiary, and the trustee must follow the terms of the trust document. A revocable trust can be changed or dissolved by the grantor; an irrevocable trust cannot be altered once it is established.
Custodial accounts (UGMA and UTMA)
A custodial account lets an adult custodian manage assets for a minor. The contribution is an irrevocable gift: it belongs to the minor and cannot be taken back. There is exactly one custodian and one minor per account, and no margin or options trading is allowed. The minor takes full control at the age of majority, 18 or 21 depending on the state (UTMA can run somewhat later). The difference between the two is scope: UGMA (Uniform Gifts to Minors Act) holds a narrower set of assets, while UTMA (Uniform Transfers to Minors Act) allows a broader range.
Joint Tenants with Right of Survivorship (JTWROS): When one owner dies, their share passes directly to the surviving owner(s): bypasses probate. Each owner has an equal, undivided interest.
Tenants in Common (TIC): When one owner dies, their share passes to their estate/heirs (NOT to the other account holders). Owners can have unequal ownership percentages.
Exam trap: Community property states have different rules, but the SIE focuses on JTWROS vs. TIC.
In a Joint Tenants with Rights of Survivorship (JTWROS) account, if one owner dies, what happens to their share?
A customer opens a UGMA account for their 10-year-old daughter and contributes $20,000. Which of the following statements is correct?
Opening an Account
Before any account is opened, the firm has to gather enough information to know who the customer is and whether what they want to do is suitable. This pulls together the identity rules of the Customer Identification Program with the financial picture a representative needs.
What goes on the new account form
- Full name and date of birth
- Social Security number or tax ID
- Address and phone number
- Citizenship status
- Employment status and employer
- Annual income and net worth
- Investment objectives (growth, income, speculation, preservation) and risk tolerance
- Whether the customer works for a FINRA member firm or a public company, which flags a restricted person
Extra steps by account type
- Margin account: a signed margin agreement, a credit check, and a hypothecation agreement that lets the firm pledge the customer's securities as collateral for the loan.
- Options account: the ODD delivered at or before approval, registered options principal (ROP) approval, and a signed options agreement returned within 15 days.
- Custodial account: one custodian and one minor, with all assets held as an irrevocable gift to the minor, and no margin or options.
- Corporate or partnership account: a corporate resolution or partnership agreement showing who is authorized to trade.
Margin Accounts
A margin account lets a customer borrow part of a purchase from the broker-dealer, with the securities in the account serving as collateral for the loan. Two numbers anchor everything the SIE tests: the initial deposit and the account's equity.
Regulation T: the initial deposit
Set by the Federal Reserve Board, Regulation T requires the customer to put up at least 50% of the purchase price. Buy $20,000 of stock on margin and you must deposit $10,000; the broker lends the other $10,000.
Equity
Your stake in the account is its equity:
Equity = market value − debit balance
On that $20,000 purchase, the market value is $20,000, the debit balance (the loan) is $10,000, and your equity is $10,000, exactly the 50% Reg T required. The equity percentage is simply equity divided by market value.
Putting up the initial 50% is only the start. Once the position is on, the account has to keep a minimum level of equity, and that is where margin calls come from.
- FINRA minimum maintenance is 25% of current market value for a long position.
- Most firms set a stricter house maintenance requirement, typically 30 to 35%.
- If equity falls below the requirement, the firm issues a margin call (a maintenance call). The customer has to deposit cash or securities, or the firm can sell positions to restore the equity, and it can do so without notifying the customer first.
Why equity shrinks
When the stock falls, the market value drops but the loan (the debit balance) does not, so equity absorbs the entire loss. Say that $20,000 position falls to $14,000: equity is now $14,000 − $10,000 = $4,000, or 28.6% of market value. That clears the 25% FINRA floor but would trip a 30% house call.
The trigger price
You can find the price at which a long position hits a maintenance call directly:
Trigger price = debit balance ÷ (1 − maintenance %)
With a $10,000 debit and 25% maintenance, that is $10,000 ÷ 0.75 = about $13,333. Once the market value falls to roughly $13,333, the call goes out.
Selling short, borrowing shares to sell now in the hope of buying them back cheaper, can only be done in a margin account, never a cash account.
- Regulation T still requires a 50% deposit on a short sale.
- FINRA minimum maintenance for a short position is 30% of current market value, higher than the 25% for long positions.
- The risk is theoretically unlimited, because there is no ceiling on how high the borrowed stock's price can climb.
- While short, the seller owes any dividends the stock pays to the lender of the shares.
Some securities are too volatile or too new to buy on credit, so they have to be paid for in full in a cash account:
- Options, whose premiums must be paid in full
- Mutual funds, for the first 30 days after purchase
- New issues and IPOs, also for the first 30 days
- Penny stocks, meaning stocks trading under $5 over the counter
Separately, FINRA sets a floor on getting into margin at all: a minimum equity of $2,000 (or 100% of the purchase price, whichever is less) is required to open a margin account.
Enter your position and see exactly when a margin call triggers. Practice with real scenarios before the exam.
- Reg T = 50% initial margin requirement. Customer deposits half, broker-dealer lends half.
- Equity = Market Value − Debit Balance. The loan stays constant; equity absorbs all gains and losses.
- Minimum maintenance = 25%. If equity falls below this, a margin maintenance call is issued.
- Margin amplifies both gains and losses. David's equity fell 75% on a 37.5% stock decline.
- If you don't meet a margin call, the broker-dealer can liquidate your securities without permission.
Under Regulation T, an investor purchasing $30,000 of stock in a margin account must deposit a minimum of:
An investor buys $30,000 of stock in a margin account under Regulation T. How much must the investor deposit?
Which of the following securities CANNOT be purchased on margin?
An investor's margin account has a market value of $18,000 and a debit balance of $10,000. The firm's maintenance requirement is 25%. Is a margin call required?
Chapter Essentials
Account ownership decides where assets go when an owner dies: JTWROS passes a share directly to the surviving owners and bypasses probate, while TIC sends it to the deceased's estate. A custodial account (UGMA or UTMA) holds an irrevocable gift to a minor, with one custodian and one minor, no margin or options, and control passing to the minor at the age of majority. Discretion over what, how much, or whether to trade requires written authorization; choosing only the time or price of an order does not.
On margin, Regulation T (set by the Federal Reserve) requires a 50% initial deposit, and equity = market value − debit balance. After that, FINRA maintenance is 25% for long positions and 30% for short positions, with most firms setting stricter house requirements; fall below it and the firm can issue a margin call and sell securities without notice. Options, mutual funds and new issues (first 30 days), and penny stocks cannot be bought on margin, and it takes $2,000 of equity to open a margin account.
The reliable gotchas in this chapter:
• JTWROS goes to the survivor, TIC goes to the estate. That single distinction is the most tested point on account registration. JTWROS bypasses probate; TIC can have unequal ownership shares.
• Time and price are not discretion. A broker who picks only when or at what price to fill an order the customer already specified is not exercising discretion. Choosing the security, the amount, or whether to buy or sell is, and that needs written authorization.
• Reg T is 50% and set by the Fed; maintenance is FINRA's. Do not mix them. Regulation T (Federal Reserve) is the 50% initial deposit; FINRA maintenance is 25% long and 30% short, with house requirements often higher.
• The loan does not shrink. When a margin stock falls, the debit balance stays fixed and equity absorbs the whole drop, which is what eventually triggers a maintenance call.
• Some things can't be bought on margin. Options, mutual funds and new issues for their first 30 days, and penny stocks must be paid in full, and it takes $2,000 of equity to open a margin account.
• Custodial accounts are irrevocable and bare-bones. One custodian, one minor, the gift cannot be reclaimed, and no margin or options. Control transfers to the minor at the age of majority.
Test yourself with exam-style questions on this topic.