FINRA Arbitrators Sustain TD Ameritrade Margin Sell-Out

Claimant had a margin account with Respondent, and was subjected to a margin call of approximately $72,000 in April 2010. He seeks to hold Respondent liable for not making further efforts to satisfy the call through the sale of a non-marginable security held in this margin account, namely, $100,000 principal amount of Colonial Square 9.0% bonds maturing October 15, 2017 and purchased by Claimant for $65,000. Respondent did publish to the marketplace that this security was available, but the only bid that it received was $44.75 per $100 of face value, which it regarded as unacceptably low. Respondent rejected Claimant's request that it contact an Arkansas dealer from whom Claimant had purchased the bonds, to see if it would be interested in buying them. It was Respondent's policy, as well as industry practice, not to allow directed trades for retail clients. Moreover, the Arkansas dealer had not responded to the prior solicitation of bids. A letter from the Arkansas dealer dated April 19, 2017 states that, had Respondent contacted it in April 2010, it "would have considered paying in the range of 60 for those bonds." 

The margin call was satisfied by the sale of $640,000 principal amount of other bonds in Claimant's account. Respondent consulted with Claimant as to the bonds to be sold. Claimant seeks damages on the basis of the alleged loss of principal and interest resulting from the sale of these bonds. 

We conclude that Respondent was within its rights in acting as it did. The Client Agreement that Claimant signed specifically provided that if the equity in his account fell below the margin requirement, Respondent "can force the sale of securities or other assets" in his account, and can sell such securities and other assets without contacting him. Moreover, Claimant "is not entitled to choose which securities or other assets in my account are liquidated or sold to meet a margin call." These provisions represent the industry standard as exemplified by FINRA Rule 2264, Margin Disclosure Statement, which contains identical language. SEC pronouncements are to the same effect. 

Moreover, Respondent had no obligation to permit Claimant to withdraw the Colonial Square bonds so that Claimant could seek to sell them to the Arkansas dealer and use the proceeds to satisfy the margin call. The Client Agreement makes clear that when Claimant purchases securities on margin, "l am borrowing money from you and pledging all securities and other property in my Account as collateral for these loans." Thus, even though the Colonial Square Bonds were non-marginable, since they were in the margin account they still served as collateral that Respondent was entitled to retain once there was a margin call. 

There is nothing in Regulation T that leads to a different result. The provision that "cash or securities may be withdrawn from an account, except if. . . the withdrawal . . .would create or increase a margin deficiency gave Respondent the option to permit the withdrawal of the Colonial Square bonds. It did not give Claimant the right to do so and thereby deplete the collateral expressly made available to Respondent. 

Respondent called an expert witness. Based on his extensive experience with compliance and enforcement issues, he convincingly testified that Respondent, in acting as it did, had violated no obligation that it owed to Claimant. 

FINRA Rule 2264. Margin Disclosure Statement

(a) No member shall open a margin account, as specified in Regulation T of the Board of Governors of the Federal Reserve System, for or on behalf of a non-institutional customer, unless, prior to or at the time of opening the account, the member has furnished to the customer, individually, in paper or electronic form, and in a separate document (or contained by itself on a separate page as part of another document), the margin disclosure statement specified in this paragraph (a). In addition, any member that permits non-institutional customers either to open accounts online or to engage in transactions in securities online must post such margin disclosure statement on the member's Web site in a clear and conspicuous manner.

Margin Disclosure Statement

Your brokerage firm is furnishing this document to you to provide some basic facts about purchasing securities on margin, and to alert you to the risks involved with trading securities in a margin account. Before trading stocks in a margin account, you should carefully review the margin agreement provided by your firm. Consult your firm regarding any questions or concerns you may have with your margin accounts.

When you purchase securities, you may pay for the securities in full or you may borrow part of the purchase price from your brokerage firm. If you choose to borrow funds from your firm, you will open a margin account with the firm. The securities purchased are the firm's collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, the firm can take action, such as issue a margin call and/or sell securities or other assets in any of your accounts held with the member, in order to maintain the required equity in the account.

It is important that you fully understand the risks involved in trading securities on margin. These risks include the following:

• You can lose more funds than you deposit in the margin account. A decline in the value of securities that are purchased on margin may require you to provide additional funds to the firm that has made the loan to avoid the forced sale of those securities or other securities or assets in your account(s).
  
  
• The firm can force the sale of securities or other assets in your account(s). If the equity in your account falls below the maintenance margin requirements, or the firm's higher "house" requirements, the firm can sell the securities or other assets in any of your accounts held at the firm to cover the margin deficiency. You also will be responsible for any short fall in the account after such a sale.
  
  
• The firm can sell your securities or other assets without contacting you. Some investors mistakenly believe that a firm must contact them for a margin call to be valid, and that the firm cannot liquidate securities or other assets in their accounts to meet the call unless the firm has contacted them first. This is not the case. Most firms will attempt to notify their customers of margin calls, but they are not required to do so. However, even if a firm has contacted a customer and provided a specific date by which the customer can meet a margin call, the firm can still take necessary steps to protect its financial interests, including immediately selling the securities without notice to the customer.
  
  
• You are not entitled to choose which securities or other assets in your account(s) are liquidated or sold to meet a margin call. Because the securities are collateral for the margin loan, the firm has the right to decide which security to sell in order to protect its interests.
  
  
• The firm can increase its "house" maintenance margin requirements at any time and is not required to provide you advance written notice. These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call. Your failure to satisfy the call may cause the member to liquidate or sell securities in your account(s).
  
  
• You are not entitled to an extension of time on a margin call. While an extension of time to meet margin requirements may be available to customers under certain conditions, a customer does not have a right to the extension.

(b) Members shall, with a frequency of not less than once a calendar year, deliver individually, in paper or electronic form, the disclosure statement described in paragraph (a) or the following bolded disclosures to all non-institutional customers with margin accounts:

Securities purchased on margin are the firm's collateral for the loan to you. If the securities in your account decline in value, so does the value of the collateral supporting your loan, and, as a result, the firm can take action, such as issue a margin call and/or sell securities or other assets in any of your accounts held with the member, in order to maintain the required equity in the account. It is important that you fully understand the risks involved in trading securities on margin. These risks include the following:

• You can lose more funds than you deposit in the margin account.
  
  
• The firm can force the sale of securities or other assets in your account(s).
  
  
• The firm can sell your securities or other assets without contacting you.
  
  
• You are not entitled to choose which securities or other assets in your account(s) are liquidated or sold to meet a margin call.
  
  
• The firm can increase its "house" maintenance margin requirements at any time and is not required to provide you advance written notice.
  
  
• You are not entitled to an extension of time on a margin call.

The annual disclosure statement required pursuant to this paragraph (b) may be delivered within or as part of other account documentation, and is not required to be provided in a separate document or on a separate page.

(c) In lieu of providing the disclosures specified in paragraphs (a) and (b), a member may provide to the customer and, to the extent required under paragraph (a) post on its Web site, an alternative disclosure statement, provided that the alternative disclosures shall be substantially similar to the disclosures specified in paragraphs (a) and (b).

(d) For purposes of this Rule, the term "non-institutional customer" means a customer that does not qualify as an "institutional account" under Rule 4512(c).

• FINRA
• Arbitration
• Margin
• Sell Out
• Rule 2264
• bonds
• Reg T
• Regulation T
• BrokeAndBroker
• Bill Singer