What does a 'sell-out' accomplish for a firm facing an overdue cash account debit?

What does a 'sell-out' accomplish for a firm facing an overdue cash account debit?

• A. Reduces the overall debt of the client
• B. Allows the firm to return shares to the market
• C. Enables the sale of shares owned by the client to cover the debit
• D. Increases the client’s available cash balance

Answer: (C)

A 'sell-out' refers to a situation where a firm sells securities held in a client's account to cover any debits or overdue amounts owed by that client to the firm. When an account has an overdue cash debit, the firm needs to protect itself from risk and recover owed funds. Selling the shares allows the firm to generate the necessary cash to settle the client’s debt. This action ensures that the firm maintains its financial integrity and reduces the risk of further financial loss associated with clients who fail to fulfill their payment obligations.

In contrast, the other choices focus on aspects that are not directly relevant to the purpose of a 'sell-out.' Reducing the overall debt of the client is not the goal, as the intention is to recover the owed amount, not to lessen the debt. Returning shares to the market may be part of a wider trading strategy but is not specific to addressing overdue debits. Lastly, while the sale may provide cash to pay down the debit, it does not increase the client's cash balance; rather, it uses the existing assets to pay off debts. Thus, the correct answer highlights the primary function of a 'sell-out' in addressing overdue cash accounts.