Special Memorandum Account (SMA): Creation, Buying Power, and Market Drops
A customer's margin account has a Long Market Value of $60,000 and a Debit Balance of $20,000 (Equity = $40,000). Regulation T is 50%. What is the balance in the customer's Special Memorandum Account (SMA), and how much additional stock can the customer purchase using buying power without depositing cash?
Reg T required equity = 50% of $60,000 = $30,000. Excess Equity = $40,000 - $30,000 = $10,000 SMA. Buying Power is 2x SMA = 2 × $10,000 = $20,000 of stock.
Complete Analysis & Legal Rationale
The Special Memorandum Account (SMA) represents a line of credit reflecting excess equity above the Regulation T 50% requirement: Required Equity = 50% of $60,000 = $30,000. Actual Equity = $40,000. Excess Equity = $40,000 - $30,000 = $10,000. This $10,000 is credited to SMA. The customer can withdraw $10,000 in cash (1x SMA) or purchase $20,000 in additional marginable stock (2x SMA = SMA / 0.50). Importantly, SMA does NOT decline when market prices drop.
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:
Reg T required equity = 50% of $60,000 = $30,000. Excess Equity = $40,000 - $30,000 = $10,000 SMA. Buying Power is 2x SMA = 2 × $10,000 = $20,000 of stock.
Fails to adhere to margin rules for B.
Fails to adhere to margin rules for C.
Fails to adhere to margin rules for D.
Official Standard: The Special Memorandum Account (SMA) represents a line of credit reflecting excess equity above the Regulation T 50% requirement: Required Equity = 50