Margin Violations

Margin violations arise from your broker’s failure to properly disclose the risks of margin trading and terms of margin loans, such that a brokerage firm can sell out any securities in the portfolio at their discretion if your account equity (its value) dips below the minimum equity requirements of the firm for each of the stocks. If you notice all your investments declined or were sold out when the market declined, your broker may have violated relevant margin rules. A New York investment margin violations law firm like Malecki Law can review your margin portfolio at no cost. Certain stocks have low equity requirements, others have high equity requirements, and some stocks are not marginable. When a firm sells, it is called a “margin call” and it usually happens at the worst time in the market (or even the worst time of the day you are sold out). This means you will likely lose a lot of money.

You can actually lose more than you gave your broker to invest, and you could wind up owing the brokerage firm money. However, if your broker recommended that you use margin, but did not fully inform you as to how it all worked, you may have an action against the broker and brokerage firm. A New York investment margin violations attorney at Malecki Law can review your margin sales in a free consultation. Regulators hold brokerage firms accountable for misconduct related to margin violations. For example, the SEC fined Morgan Stanley $7.5 million, and FINRA fined Morgan Stanley $2.75 million, for margin-related violations. The SEC found that the firm utilized customers’ funds to essentially decrease its own borrowing costs. This type of activity violates the SEC’s Customer Protection rule because the firm did not keep customer funds safe and secure. Additionally, FINRA found that Morgan Stanley did not have adequate procedures in place to ensure customer funds were segregated and preserved. FINRA further found that this lack is what resulted in events where the firm wrongfully used customer funds.

As to the relevant rules, under FINRA Rule 2264, your broker is required to provide you with a margin disclosure statement before opening a margin account. Further, if you are a non-institutional customer, the brokerage firm must post this statement on its website “in a clear and conspicuous manner.” If your broker recommended that you trade on margin and did not provide you with any information regarding the risks, you may have an action against the broker and brokerage firm. An investment margin violations lawyer in New York at Malecki Law can review your margin agreements, notices, and positions. Moreover, under FINRA Rule 4210(g), prior to the first transaction in your margin account, your brokerage firm must provide you with a disclosure statement that outlines and describes margin risks. You must sign and acknowledge the disclosure statement.

The general rule is that your amount of equity in the account at issue, cannot fall below 25% of the market value of the account. If your broker failed to disclose and explain the risks associated with opening a margin account, you may have a claim against your broker. A New York investment margin violations law firm like Malecki Law can review your situation to see if you have a case, with experience in margin cases. If your equity falls below the 25% mark, you may have to deposit more funds to reach the 25% mark. If your broker fails to explain and facilitate this, your brokerage firm might have to liquidate your securities in order to reach the 25% equity mark. Lastly, your broker must be aware of and comply with the relevant margin rules, including FINRA Rules 4210, 4220, 4230, and 4240.