Special Memorandum Account (SMA) Creation on Market Appreciation
A customer opens a margin account and buys 1,000 shares of stock at $40 ($40,000 total), depositing $20,000 cash under Reg T. The market value rises to $50,000. How much SMA is generated by this price increase?
For every $1 increase in market value, equity increases by $1, while the Reg T requirement increases by $0.50, creating $0.50 in excess equity (SMA). Market gain = $10,000. New SMA generated = 50% × $10,000 = $5,000.
Complete Analysis & Legal Rationale
Initial: LMV $40k, DR $20k, EQ $20k, Reg T req $20k -> SMA = $0. New: LMV $50k, DR $20k, EQ $30k. Reg T req on $50k is $25k. Excess Equity = $30k - $25k = $5,000 SMA.
Mathematical Step-by-Step Derivation
- Step 1: Market Appreciation = $50,000 - $40,000 = $10,000.
- Step 2: Excess Equity generated = 50% × $10,000 = $5,000.
- Step 3: New SMA Balance = $5,000.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
SMA equals 50% of the increase in market value above the original purchase.
Assumes 100% of the gain becomes SMA; Reg T requires 50% equity against the new value.
Uses maintenance percentage (25%) instead of Reg T percentage.
SMA is generated automatically by market appreciation above Reg T.
Official Standard: Creation of SMA credit based on excess equity above Reg T.