FINRA Series 7Processes and Confirms TransactionsHard
A customer purchases $5,000 of stock in a cash account but fails to pay by the required Regulation T payment date. The broker-dealer liquidates the position for nonpayment. What is the consequence for the customer's cash account going forward?
- AThe account is frozen for 90 days, requiring full payment in advance for any future purchase
- BThe firm must automatically convert the account to a margin account
- CThe account is permanently closed and cannot be reopened
- DThe customer is barred from trading in margin accounts for one year
Show answer & explanationAnswer & explanation
Correct answer: A. The account is frozen for 90 days, requiring full payment in advance for any future purchase
Under Regulation T, if a customer fails to pay for a cash account purchase by the required payment date and the position is liquidated, the account is frozen for 90 days. During the freeze, the customer must deposit full payment in advance before the broker-dealer will execute any further purchases.
Why the other options are wrong
- B. Reg T does not require or trigger automatic conversion to a margin account.
- C. The account is not permanently closed; it is temporarily frozen.
- D. There is no one-year margin trading ban under Reg T for this violation.
Reg T Cash Account Freeze
When a customer fails to pay for a cash account purchase by the payment deadline, Regulation T requires the account be frozen for 90 days, during which purchases require cash in advance.
- 90-day freeze period
- Cash-in-advance required for purchases during freeze
- Applies specifically to cash accounts, not margin accounts
Memory trick: Freeze for 90 — pay up front, or don't buy at all.