Series 7 Customer Account Types: Cash, Margin, and Discretionary Accounts

Customer account rules appear throughout the Series 7 — in questions about opening accounts, executing transactions, resolving disputes, and maintaining records. The tested rules are specific and detail-oriented. This guide covers the account structures you need to know cold.

Cash Accounts and Regulation T

A cash account is the standard brokerage account in which the customer pays the full cost of any securities purchased. There is no borrowing; all purchases must be paid for in full.

Regulation T, promulgated by the Federal Reserve Board under the Securities Exchange Act of 1934, governs the extension of credit by broker-dealers to customers. For cash accounts, Regulation T requires that payment for securities be received promptly. Current rules require payment within two business days of the settlement date (for equities settling T+1, that is generally by the third business day after the trade date, though the practical requirement is that funds must be available at settlement).

Freeriding occurs when a customer in a cash account purchases securities without paying for them and then sells the securities before payment is due, using the sale proceeds to fund the purchase. This violates Regulation T. The consequence is that the account is frozen for 90 days — during the freeze period, the customer must have fully paid funds in the account before placing any new purchase orders.

Margin Accounts

A margin account allows the customer to borrow from the broker-dealer to purchase securities, using the securities in the account as collateral. Margin increases both potential gains and potential losses.

Initial Margin — Regulation T

The Federal Reserve's Regulation T sets the initial margin requirement at 50% for most equity securities. This means when a customer purchases stock on margin, at least 50% of the purchase price must be funded with the customer's own equity; the broker-dealer can lend the remaining 50%.

Example: A customer buys $10,000 of stock on margin. Regulation T requires at least $5,000 of the customer's own equity. The broker-dealer lends $5,000.

Maintenance Margin

After the initial purchase, FINRA requires that the customer maintain a minimum equity level in the margin account. The minimum maintenance margin under FINRA rules is 25% of the current market value of the long securities. Most broker-dealers set a higher house maintenance requirement — typically 30% — to create a buffer before a margin call.

Maintenance margin call (margin call): If the customer's equity falls below the maintenance requirement, the broker-dealer issues a margin call demanding that the customer deposit additional cash or securities to restore the account to the maintenance level. If the customer does not respond, the broker-dealer may liquidate positions.

Calculating the Margin Call Trigger

For a long margin account: Margin call is triggered when:

Customer Equity / Market Value < Maintenance Requirement

If maintenance is 25%: Account is at risk when equity falls to 25% of market value, meaning the loan equals 75% of market value.

Trigger price = Loan Amount / (1 − Maintenance %)

Joint Accounts

Joint accounts are owned by two or more individuals. Two forms are tested:

Joint Tenants with Rights of Survivorship (JTWROS) — All owners have equal, undivided interest in the account. Upon the death of one tenant, that tenant's interest automatically passes to the surviving tenant(s) — outside of probate. The deceased tenant's interest does not pass through their estate. JTWROS is common for married couples.

Tenants in Common (TIC) — Each owner holds a specified, divisible interest in the account (interests need not be equal). Upon the death of one owner, their interest passes to their estate (per their will or intestacy) rather than to the surviving co-owner. TIC is common for business partners or investors who want separate, inheritable interests.

Orders in a joint account may be placed by any authorized account holder without the other's signature. However, any single account holder can instruct the broker-dealer to freeze the account pending resolution of a dispute.

Discretionary Accounts

A discretionary account allows the registered representative to make investment decisions — choosing which security, how many shares, and whether to buy or sell — without first obtaining specific customer approval for each transaction.

Written discretionary authorization must be obtained from the customer before any discretionary trade is executed. The authorization must be on file and must be approved by a principal of the broker-dealer.

Discretionary authority does not grant unlimited power. Even in a discretionary account, the registered representative must:

• Act in the customer's best interest under Reg BI
• Avoid churning
• Follow the customer's investment objectives and any specific restrictions

Time-and-price discretion — where the customer specifies which security and quantity but leaves the timing and pricing to the representative — is not considered full discretion and does not require written authorization (though it expires at the end of the trading day).

Special Account Types

UGMA/UTMA Accounts — Uniform Gifts to Minors Act and Uniform Transfers to Minors Act accounts are custodial accounts opened on behalf of a minor. The custodian controls the account until the minor reaches the age of majority (18 or 21, depending on the state). Gifts are irrevocable. The minor, not the custodian, owns the assets for tax purposes.

Numbered Accounts — A customer may request that their name not appear on statements and correspondence, instead using a number or code. The broker-dealer may comply, but must maintain a written record linking the number to the customer's identity.

Fiduciary Accounts — Accounts managed by a person with legal fiduciary responsibility for the account's assets on behalf of another. Examples include:

• Trust accounts — Managed by a trustee for the benefit of trust beneficiaries
• Estate accounts — Managed by an executor for distribution of a decedent's estate
• Corporate accounts — Operated under corporate resolution identifying authorized signers

Fiduciaries must act in accordance with their governing documents (trust agreement, will, corporate resolution) and applicable state law. Prudent investor standards apply to most fiduciary accounts.

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Practice Series 7 customer account questions with full explanations at advisorexams.com/exams/series-7.