General Securities Sales Supervisor (Series10) Practice Exam

Which statement about SMA in a long margin account is NOT true?

1. A The SMA balance is an available credit line to the customer

2. B The SMA balance represents the buying power in the account

3. C The SMA balance may be borrowed by the customer under certain conditions

4. D The SMA balance will increase as the market value rises above the initial margin

The correct answer is: B The SMA balance represents the buying power in the account

The assertion that the SMA balance represents the buying power in the account is not accurate. In a long margin account, the SMA, or Special Memorandum Account, is indeed a line of credit available to the customer, but it does not directly equate to the buying power in the same way that cash or margin equity does. The amount in the SMA reflects the available credit but does not necessarily indicate the total buying power, as buying power is determined by a combination of SMA and the equity in the account. The SMA can increase under certain conditions, such as when the market value of securities rises or when additional cash is deposited. Additionally, while it can be borrowed against, it is not a direct representation of what the customer can leverage for purchasing securities. Understanding the distinct roles of SMA versus overall equity and buying power is crucial for proper management of a margin account.