FINRA Lawyer Blog
We are all painfully aware of the recent volatility in the markets, which has not gone unnoticed by the SEC. On March 14, 2022, the Staff of the Division of Trading and Markets stated that “broker-dealers should collect margin from counterparties to the fullest extent possible in accordance with any applicable regulatory and contractual requirements.” We shall see whether Wall Street acts upon the SEC’s guidance, and whether investors are caught flat-footed by stepped-up maintenance margin requirements.
Regulatory and Contractual Requirements
The regulatory requirements for margin are set forth in FINRA Rule 4210. Although the rule is lengthy, and incorporates other rules including Federal Reserve Board Regulation T, the essence of the rule allows a broker-dealer to lend a customer up to 50% of the total purchase price of an eligible stock. A margin call may be issued if the margin account falls beneath the maintenance margin requirements (generally 25% of the current market value of the securities in the account) or if the margin account falls below the firm’s “house” maintenance margin requirements (which can be substantially higher than 25%). Brokerage firms can, and often do, upwardly adjust “house” maintenance margin requirements if the firm has risk concerns relating to outstanding margin loans. Most margin account agreements specifically permit broker-dealers to increase maintenance margin requirements at the sole discretion of the firm. In light of the SEC’s recent guidance, it seems likely that broker-dealers will act upon its contractual rights and demand enlarged collateral from customers to protect its margin loans.
More Volatility Expected
A primary gauge of stock market volatility is the CBOE Volatility Index (VIX). The VIX volatility index measures how much volatility professional investors think the S&P 500 will experience over the coming month. The VIX index tracks volatility by analyzing trading in S&P 500 options. As a general proposition, a VIX index of 12 or lower is a period of low volatility and a VIX index of 20 or higher is abnormally high volatility. Currently, the VIX index currently sits at 31.04, which is approximately double where it sat in early January 2022.
Increase in FINRA Arbitration Claims?
Undoubtedly, any sizable increase maintenance margin requirements will trigger margin calls. That, coupled with abnormal market volatility, is a recipe for increased FINRA arbitration claims. Investors will point fingers at brokerage firms over suitability and brokerage firms will point fingers at investors for any unsecured debit balances.
Herskovits PLLC has a nationwide practice defending and prosecuting claims in FINRA arbitration. Feel free to call us for a consultation at (212) 897-5410.