Regulation T: Credit by Brokers and Dealers

Settlement cycles (the standard-settlement-cycle rule) tell you when securities change hands. Regulation T tells you who extends credit to fund the purchase and by what deadline the customer must pay. For Series 6, the margin-account scope is off-limits, so Reg T reduces to three tested concepts: the payment period, freeriding, and the 90-day cash-account freeze.

What does Regulation T cover?

Regulation T is issued by the Federal Reserve Board under the Securities Exchange Act. It governs the extension of credit by broker-dealers (BDs) to customers for the purchase of securities.

Reg T covers:

• Margin requirements on margin accounts (out of scope for Series 6 representatives)
• Payment period for cash-account purchases
• Cash-account freeriding and the 90-day freeze

Series 6 relevance: Series 6 representatives cannot open or recommend margin accounts (a product restriction), so this unit focuses on cash-account payment obligations and credit extensions for mutual-fund purchases.

How long does a customer have to pay for a cash-account purchase under Regulation T?

The "payment period" is the Reg T term for how long a customer has to fund a purchase after trade date.

• Payment period under Reg T = the standard settlement cycle (T+1) plus 2 business days = T+3
• A broker-dealer must promptly cancel or otherwise liquidate a customer's purchase transaction if payment is not received within the payment period
• Extensions: the firm may apply to its examining authority for an extension for an extraordinary circumstance. The application must be filed and acted on before the payment period, or any later extension, expires. Routine extensions are disfavored
• The $1,000 disregard: the creditor may disregard an amount due of $1,000 or less rather than cancel or liquidate the position

Exam Tip: Gotchas

• The Reg T payment period is T+3 under a T+1 settlement cycle. Payment period = standard settlement (T+1) + 2 business days. The shift to a T+1 settlement cycle shortened the payment period from T+4 to T+3. A question referencing "T+4 payment period" is outdated.

What is freeriding and what does the 90-day cash-account freeze require?

The freeriding rule prevents a customer from using sale proceeds to pay for the original purchase.

• Freeriding: a customer buys a security in a cash account and sells it before paying for the purchase
• Consequence: if a nonexempted security is sold or delivered to another broker without having been previously paid for in full, the privilege of delaying payment beyond the trade date is withdrawn for 90 calendar days following the sale
• During the 90-day freeze, the customer may still buy securities in the cash account, but must pay in full on the trade date (no credit extension)
• Good-faith-payment exception: the 90-day freeze does not attach if full payment (or a cleared check) is received before the sale proceeds are withdrawn

Think of it this way: a cash account is a "pay-as-you-go" arrangement. The customer is allowed a short delay (T+3) to deliver the cash. Selling the security before paying for it converts the arrangement into an unauthorized short-term credit extension, which is why Reg T penalizes the behavior with a 90-day "no credit" window. The customer keeps trading privileges but loses the grace period.

Exam Tip: Gotchas

• A 90-day "freeze" does NOT close the account. It removes the credit-extension privilege. The customer may still purchase securities during the freeze but must pay in full on the trade date with settled funds. The label "cash-account freeze" is shorthand for "full-payment-on-trade-date required."

How does Regulation T apply to mutual fund purchases?

Mutual-fund orders fit into the cash-account framework cleanly.

• Mutual-fund purchases are typically cash-account transactions; the customer must pay by T+3 (the Reg T payment period after T+1 settlement)
• Mutual-fund shares may be used as collateral for margin loans after 30 days from purchase, but margin accounts fall outside the Series 6 rep's authority. This 30-day bar comes from the securities-exchange statute's credit-extension provision, which stops a member of the selling group from extending credit on a new issue it helped distribute. It is not a Regulation T percentage rule
• Variable contracts are not "securities purchased on credit" in the Reg T sense; premiums are paid directly to the insurance carrier under the contract terms

Exam Tip: Gotchas

• Series 6 reps cannot recommend or operate margin accounts. For a Series 6 rep, Reg T reduces to the conceptual level (payment period, freeriding, 90-day freeze), not margin-loan mechanics. A request to open a margin account or set initial margin must be declined or referred to an appropriately registered rep.

What Should You Check on Exam Day?

• Can you state the Reg T payment period for a cash-account purchase under a T+1 settlement cycle (T+3)?
• Do you know what freeriding is, and that it triggers a 90-day freeze requiring full payment on trade date, not account closure?
• Can you state the good-faith-payment exception that prevents the 90-day freeze from attaching?
• Do you know that Series 6 representatives cannot open or recommend margin accounts, so Reg T's margin provisions are out of scope?