SIE - Understanding Trading, Customer Accounts and Prohibited Activities (31% of the exam) - Section 3.2

Distinguish customer account types and registrations, including cash, margin, options, joint, trust, custodial, and retirement accounts and their characteristics.

Distinguish cash, margin, options, discretionary, and fee-based accounts and the registrations under which they are held - individual, joint, trust, custodial UTMA, and retirement accounts such as IRAs and qualified plans. Recognise the contribution and required minimum distribution features of retirement accounts and the documentation each account type requires.

Cash accountMargin accountCustodial accountIndividual retirement accountDiscretionary account

Practice question for this objective

Free sampleUnderstanding Trading, Customer Accounts and Prohibited Activitiesmedium

What best describes the defining feature that distinguishes a margin account from a cash account?

AA margin account may hold equities, while a cash account may hold only mutual funds and money market instruments.
BA margin account is available only to institutional customers, while a cash account is the only type available to retail customers.
CA margin account settles trades on a same-day basis, while a cash account settles on the regular-way schedule.
DA margin account permits a customer to borrow part of the purchase price from the firm, while a cash account requires the full purchase amount to be paid. Correct

A margin account lets a customer borrow against securities under Regulation T, whereas a cash account requires payment in full. The core difference is credit: a margin account operates under Regulation T so the firm may lend a portion of the purchase price, while a cash account demands full payment for every purchase.

Why A is wrong: This is tempting because product menus feel account-specific, but it is wrong: both cash and margin accounts can hold equities, and the distinction is about credit, not eligible products.

Why B is wrong: This is tempting because institutions trade on margin heavily, but it is wrong: retail customers may open margin accounts once they sign a margin agreement and meet suitability requirements.

Why C is wrong: This is tempting because settlement varies by product, but it is wrong: settlement timing is set by the security type and regulation, not by whether the account is cash or margin.

Why D is correct: This is correct because the essence of a margin account under Regulation T is the extension of credit by the broker-dealer, whereas a cash account requires payment in full for all purchases.

See more SIE practice questions, answers explained.

Exam traps in Understanding Trading, Customer Accounts and Prohibited Activities

Answers that look right on this material and are not. Each one is a distractor from a different question in the SIE bank for this domain.

In a cash account the customer may borrow part of the purchase price from the firm, while a margin account requires payment in full.
Why it is wrong: This reverses the two account types; borrowing is the defining feature of a margin account, so a candidate who confuses the labels finds it tempting, but it is wrong because a cash account never permits the firm to lend against the purchase.
A trust account is exempt from suitability and know-your-customer obligations that apply to an individual account.
Why it is wrong: It is tempting to assume a formal legal entity carries fewer duties, but it is wrong because suitability and account-information rules apply to trust accounts just as they do to individual ones.
Only a margin agreement, because every options strategy is treated by regulators as a margin transaction
Why it is wrong: Tempting because uncovered options need margin, but a covered call written against fully paid stock does not require a margin loan, and options approval is a separate requirement from the margin agreement.

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