SMA Preservation Principle During Market Downturns
A margin account has an LMV of $60,000, DR of $30,000, and an SMA balance of $8,000. The market value subsequently drops to $45,000. Assuming no customer withdrawals or transactions, what is the NEW SMA balance?
THE GOLDEN RULE OF SMA: SMA NEVER DECLINES DUE TO A DROP IN MARKET VALUE. It represents a preserved line of credit that remains intact until utilized by the customer to withdraw cash or purchase securities.
Complete Analysis & Legal Rationale
Even if the account becomes restricted (equity < 50%), the customer retains the full SMA balance of $8,000. SMA only decreases when the customer executes transactions (buys stock or withdraws cash).
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 is a line of credit that is never reduced by market declines.
Falling market values do not wipe out SMA.
Arbitrary deduction.
Assumes 50% loss of SMA.
Official Standard: SMA balances remain fixed until customer withdrawal or purchase utilization.