General Securities Sales Supervisor (Series10) Practice Exam

What limitation is there on shares purchased with SMA?

1. A Share purchases are limited to cash only

2. B Share purchases can only be made if the account is at maintenance margin

3. C SMA can only be used for stocks in the same sector

4. D There are no limitations on using SMA for purchases

The correct answer is: B Share purchases can only be made if the account is at maintenance margin

When considering the limitation on shares purchased with Special Memorandum Account (SMA), it is important to understand what SMA represents in the context of margin accounts. SMA is a line of credit that can be utilized by the account holder to purchase additional securities. However, there are conditions that must be met, particularly concerning the maintenance margin requirement. When an account is at maintenance margin, it indicates that the equity in a margin account has not fallen below the required minimum level. This means that the account holder has met the necessary criteria to engage in additional buying while utilizing the SMA. Therefore, the correct option reflects the necessity for the account to maintain its margin requirements before shares can be purchased with SMA. If the account drops below this maintenance level, the ability to use SMA for purchasing additional shares could be restricted. This highlights an important aspect of managing margin accounts: maintaining sufficient equity is crucial for ensuring that the account can support further investments without facing margin calls or restrictions on purchasing power.