Understanding FINRA’s New Rules on Trading Low-Priced Equities

The Financial Industry Regulatory Authority (FINRA) has issued a regulatory notice addressing price volatility concerns associated with low-priced equity securities in customer margin and firm proprietary accounts. The notice advises that close attention be paid to low-priced equity securities; price volatility is usually associated with low-priced equities because they are inherently volatile. But what does FINRA consider a “low-price equity,” and what does it mean for you and your customers?

FINRA advises firms to weigh the risks that come with low-priced equity securities before extending credit in strategy-based or portfolio margin accounts. FINRA cautions firms to consider “volatility and concentrated positions in a single customer account and across all customer accounts, as well as the daily volume and market capitalization of each security when imposing ‘house’ maintenance margin requirements.”

For instance, it is more likely for newer companies to have low-priced equities due to their undeterminable earnings (unlike older companies with higher-priced equities which have already established themselves in the market). Further, low-priced equity securities can be removed from an index, which also raises the equity’s volatility level and price risk.

A house maintenance margin requirement is the minimum equity level that the customer must maintain in his or her margin account. This requirement is unique to each brokerage firm. Generally, a firm’s house maintenance requirement will be higher than the federal maintenance margin so that firms do not subject themselves to high risk levels if customers are unable to maintain their minimum equity levels.

The federal requirement for long equity securities is approximately 25 % of the current market value; it is approximately 30 percent for short equity securities. For portfolio margin accounts, the minimum maintenance requirement –for long and