Rule 431?

[IIC]

I never got into margin trouble...But I have a couple of questions.

1) What happens if you try to make a trade in an IRA type account for more than the cash available that you you actually have?...I've done this lots of times and nothing ever happened to me. Now, from what it appears I cannot do it for too much though...But a few hundred bux doesn't seem to matter...just shows a negative cash balance...But one time I actually tried to make a trade for $8,000 over what was available...actually, I made a mistake...But the order would not fill due to insufficient cash available.

2) What are the penalties for pattern day trading in a non-margin account?...For example, an IRA type account. I inquired from a broker...They said I couldn't do it even though the account has over $25,000. But they couldn't tell me what the penalty would be. What are they gonna do...take away my non-existent margin?

3) What are the penalties if you sell a stock you bot with Unsettled Funds and sell it before the funds are settled? I've done this in my wife's IRA (only one time on purpose because the stock was tanking and I figured the penalty couldn't be worse than the loss she was gonna take if I didn't sell)? Sure I got this scathing email warning...Well, actually she got it...But that was it...In fact that's always it...Although, the threatened penalty only seems to be restricted trading for 90 days...So if that happens I move the account.

Seems to me that the brokers have an obligation to not allow a trade to fill if it violates any laws.

I also think that the Unsettled Funds thing is a bunch of Bull...A couple years ago we had a thread here devoted to that...I was willing to lead a crusade against it...Especially since all brokers did not have it at the time...The NASD was going around making deals with different brokers as I recall....But I was not able to gather enough support to make a battle worthwhile...But think about it...It is truly unfair...Doug(IIC)

[DSteckler]

<< 2) What are the penalties for pattern day trading in a non-margin account?...For example, an IRA type account. I inquired from a broker...They said I couldn't do it even though the account has over $25,000. But they couldn't tell me what the penalty would be. What are they gonna do...take away my non-existent margin? >>

They can restrict the account and not allow buys, only sells.

[Adman]

I never got into margin trouble...But I have a couple of questions.

1) What happens if you try to make a trade in an IRA type account for more than the cash available that you you actually have?...I've done this lots of times and nothing ever happened to me. Now, from what it appears I cannot do it for too much though...But a few hundred bux doesn't seem to matter...just shows a negative cash balance...But one time I actually tried to make a trade for $8,000 over what was available...actually, I made a mistake...But the order would not fill due to insufficient cash available.

2) What are the penalties for pattern day trading in a non-margin account?...For example, an IRA type account. I inquired from a broker...They said I couldn't do it even though the account has over $25,000. But they couldn't tell me what the penalty would be. What are they gonna do...take away my non-existent margin?

3) What are the penalties if you sell a stock you bot with Unsettled Funds and sell it before the funds are settled? I've done this in my wife's IRA (only one time on purpose because the stock was tanking and I figured the penalty couldn't be worse than the loss she was gonna take if I didn't sell)? Sure I got this scathing email warning...Well, actually she got it...But that was it...In fact that's always it...Although, the threatened penalty only seems to be restricted trading for 90 days...So if that happens I move the account.

Seems to me that the brokers have an obligation to not allow a trade to fill if it violates any laws.

I also think that the Unsettled Funds thing is a bunch of Bull...A couple years ago we had a thread here devoted to that...I was willing to lead a crusade against it...Especially since all brokers did not have it at the time...The NASD was going around making deals with different brokers as I recall....But I was not able to gather enough support to make a battle worthwhile...But think about it...It is truly unfair...Doug(IIC)

Doug- I am not an expert in compliance on the retail side of the business, but I will share some of what I know. BTW-The NASD is always changing rules, and I don't follow them, but here's what I (think) I know:

1) You are allowed to trade in an IRA, and I believe this is called a self directed IRA. It has always been my understanding that IRA’s were cash only accounts. The reason being, if you did have margin, the market tanks and you get a margin call, it would be hard to deliver cash to the account: i.e.: potential over funding for a calendar year or, if you do need to add cash to cover a margin call, and you do not qualify for an IRA (such as someone that has max funded their 401k at work), then you would be delivering non-qualified funds to a qualified account.

2) I do not believe there is a legal penalty for day trading an IRA account. I do know that it becomes a costly accounting nightmare for the custodian of the fund. Somewhere in the .5 font fine print of your account agreement there is probably a line prohibiting it. Probably, in most cases, if you violate it, you will get the cease and desist email. If you continue, they will probably lock your account out on the buy side, limiting you to sells only.

3) Trading with unsettled funds could be deemed as a case of free riding. In 99% of the cases, there is not a penalty (legal that is) against the account holder. Most of the time, you will receive a warning, and possibly a temporary suspension of trading on the account. If it is a case of flagrant and regular abuse, in rare (and extreme cases), the broker-dealer will freeze the account, liquidate positions to cash and request you ACAT the account to another custodian. Even though the account holder is rarely penalized, the broker-dealer can be fined by the NASD for allowing these violations in qualified account.

Regarding unsettled funds: It is my understanding (and I caution, limited knowledge) it is handled on a case-by-case review. If it is a minor overlap, say you sold a position 3 days ago, bought one today using the funds from that unsettled trade, that will hit your account tonight; that trade will probably go through. If you sell something today, and you do not have funds in your account, and buy something today, that is a violation. You as the account holder will not get into hot water, but your broker-dealer will. On the retail side, when you use a stockbroker, that broker has a compliance officer (principal) that has to sign off and approve all new accounts and trades. If one gets by, both the broker and principal will be called on the carpet by the broker-dealer’s compliance department. Such offenses are usually reportable to the NASD, marking the brokers record.
With on line trading, the programs should be built in to prevent these sorts of things. I do know, for a fact, that when these firms have their annual NASD compliance audit that is one of the things the NASD specifically looks for.
In most cases, unless it is a clear case of rule manipulation, the account holder is in the clear, regarding legal penalties. The broker dealer is the one that is on the hook for allowing the violations to occur in the first place.

I am not a well-versed expert, but this is what I know to be true. I have been away from the business for a while, and the rules I knew have been somewhat modified. Do not take this as gospel, but do use them as guidelines until you have a real expert clarify these for you or check out www.nasd.com

[DSteckler]

<< 1) You are allowed to trade in an IRA, and I believe this is called a self directed IRA. It has always been my understanding that IRA’s were cash only accounts. The reason being, if you did have margin, the market tanks and you get a margin call, it would be hard to deliver cash to the account >>

No, that's not the reason.

There are two types of brokerage accounts: cash and margin. Margin accounts involve the use of collateral. Under the Internal Revenue Code, if any part of an IRA is used as collateral, the entire IRA is considered distributed and thus subject to income tax and penalties.

My recommendation is to leave tax advice to the tax experts.

[Adman]

<< 1) You are allowed to trade in an IRA, and I believe this is called a self directed IRA. It has always been my understanding that IRA’s were cash only accounts. The reason being, if you did have margin, the market tanks and you get a margin call, it would be hard to deliver cash to the account >>

No, that's not the reason.

There are two types of brokerage accounts: cash and margin. Margin accounts involve the use of collateral. Under the Internal Revenue Code, if any part of an IRA is used as collateral, the entire IRA is considered distributed and thus subject to income tax and penalties.

My recommendation is to leave tax advice to the tax experts.

You are correct here. I spoke with someone a few minutes ago (someone in the know), about this.
We are both correct, you more so than me. It is not allowed to deliver “additional contributions” to an IRA if: a) you are not qualified to have an IRA for the calendar year in question or b) If you had previously max funded for the calendar year in question. If this were allowed, everyone would add monies to their IRA’s to replace market losses.

Regarding margin trading in IRA’s, he did confirm what you said, and it is prohibited. He went on to explain that if an IRA is collaterized (a necessity for a margin account), then a taxable event is triggered. If that occurred, then the entire account balance becomes taxable as ordinary income. Additionally, if the accountholder is under 59 ½, an additional 10% excise penalty is incurred. Interestingly, he points out that any pre-mature distribution for a qualified account will incur a 10% excise penalty, but, you the account holder, is responsible for applying that penalty on you 1040. If you do not, in about 18 months time, you will receive a letter from the IRS looking for additional fines and penalties, which can exceed 30% of the amount withdrawn (above and beyond the ordinary income tax!).
He also indicated that there are very stringent checks and balances in place at every BD in the country to prevent this. If you are able to slip it be (almost impossible), then you would probably have a strong case against the BD for allowing it.
End result: If you have a self directed IRA, it cannot be margined, and if you take trading losses, they cannot be made up for with additional deposits.

[Lyehopper]

wasted time....

Can you fellas beleive all of the wasted time to post to this bogus thread? And all of the other Adman and Stock Boy "BS" Threads.

What I really like is how ADman refers to Stock boy as "son"..... Ahhhhhhh!!!! that's funny!.... Am I the only one finding this whole thing amusing?jejejeeeeeee

[billyjoe]

Geeze, I'm glad I didn't take the "boy" under my wing.

billyjoe

[Karel]

Pathetic also comes to mind. I think we can safely scrap all Adman's posturing as a WallStreet Whatnot.

Regards,

Karel

[scifos]

Can you fellas beleive all of the wasted time to post to this bogus thread? And all of the other Adman and Stock Boy "BS" Threads.

What I really like is how ADman refers to Stock boy as "son"..... Ahhhhhhh!!!! that's funny!.... Am I the only one finding this whole thing amusing?jejejeeeeeee

Lol, I loved the "you're in trouble son" even before I found out he was just talking to himself.

[Gatorman]

Can you fellas beleive all of the wasted time to post to this bogus thread? And all of the other Adman and Stock Boy "BS" Threads.

What I really like is how ADman refers to Stock boy as "son"..... Ahhhhhhh!!!! that's funny!.... Am I the only one finding this whole thing amusing?jejejeeeeeee

Lye:
It makes you wonder what mindset this guy possessed. He certainly invested quite a bit of time in his efforts to make some point. I assume that his motives would have become more clear had he not been unmasked.
Can we assume he was going to offer some type of subscription to a fradulent stock picking service or do you think he was seeking applause only?
Inquiring minds want to know.

[Websman]

And to think....Lye was suspicious of Adman from the start...

[billyjoe]

Maybe I'm naive . Let's give them the benefit of the doubt. What if it's an innocent Batman and Robin type relationship. Instead of criminals they were taking on bad business guys.
billyjoe

[Lyehopper]

And to think....Lye was suspicious of Adman from the start...

And so was Dave Steckler.

[Websman]

And so was Dave Steckler.

Dave is very smart... I'm just a dumb Redneck.

[RL]

who am I and why am I here?????????????