Quick Answer
Cash accounts require full payment within the Regulation T payment period (T+3), and free-riding (selling before paying, then using the proceeds to pay) triggers a 90-day freeze that still allows prepaid purchases. Prime brokerage, DVP/RVP, and fee-based accounts each serve institutional or active-trading needs with their own custody and payment mechanics.
Before you can evaluate suitability or make recommendations, you need to understand the different account structures available to customers. Each account type has distinct rules for payment, leverage, custody, and fee arrangements.
What Is a Cash Account?
- Cash account: The customer pays in full for all securities purchased within the Regulation T payment period: the settlement cycle plus 2 business days, or T+3 (a firm may ask for payment sooner as house policy)
- No borrowing from the broker-dealer: no margin, no leverage
- The simplest and most common account type
What Is a Free-Riding Violation?
- Free-riding: Buying securities in a cash account, selling them before paying in full, and using the sale proceeds to cover the original purchase
- Why it's possible: the trade executes on the trade date but payment is not due until the end of the Regulation T payment period (T+3). That gap between executing the trade and delivering funds is what the free-rider exploits.
- This violates Regulation T (the Federal Reserve Board's credit regulation)
- Consequence: A 90-day freeze on the account
- During the freeze, the customer can still trade but must have sufficient settled cash in the account before placing any purchase
Exam Tip: Gotchas
- Free-riding is about the sequence: buying, then selling before paying, then using sale proceeds to pay. The 90-day freeze doesn't prevent all trading; it just requires cash up front for every purchase.
FINRA replaced its pattern day trader rule, including the $25,000 minimum equity requirement, with intraday margin standards effective June 4, 2026. This course does not test the old day-trading figures.
What Is a Prime Brokerage Account?
- Prime brokerage: A customer (typically an institution or hedge fund) selects one member firm as the prime broker to provide:
- Custody and clearing
- Financing
- Consolidated reporting
- Securities lending
- Trades are executed through other firms (executing brokers) but settled and held at the prime broker
- Key benefit: reduced borrowing costs through a single margin relationship
What Are DVP and RVP Accounts?
- DVP (delivery versus payment): The settlement convention for an institutional buyer; payment is released only against simultaneous delivery of the purchased securities, so neither party is exposed to settlement risk
- RVP (receive versus payment): The counterpart convention for an institutional seller; the securities are delivered only against simultaneous receipt of payment
- Typically used by institutional investors (banks, pension funds, insurance companies)
- Custody of assets is held at a third-party institution (usually a bank), not the broker-dealer
- Settlement occurs on a trade-by-trade basis rather than through a standard brokerage account
Exam Tip: Gotchas
- DVP/RVP accounts eliminate principal risk (the risk that one side delivers but the other doesn't pay).
- Assets are custodied at a third-party bank, not the broker-dealer. Account statements typically show no cash balance or security positions because everything settles individually.
When Is a Fee-Based Account Appropriate?
- Fee-based account: Customer pays a flat fee or percentage of assets under management (AUM) instead of per-trade commissions
- Advisory account: A fee-based account where the broker-dealer or investment adviser provides ongoing investment advice and portfolio management
Which Fee Structure Fits Which Customer?
| Fee Structure | Best For | Why |
|---|---|---|
| Fee-based (% of AUM) | Active traders | Many trades, lower per-trade cost |
| Commission-based | Buy-and-hold investors | Few trades, no ongoing fee |
- Firms must evaluate whether a fee-based arrangement is in the customer's best interest under Regulation Best Interest (Reg BI), which means weighing the actual costs, the services, and the customer's trading activity, not assuming a fee-based account is cheaper
Exam Tip: Gotchas
- A fee-based account is NOT always better for the customer. If a customer rarely trades, paying a percentage of AUM every year can cost far more than occasional commissions. For a low-activity customer, a fee-based account can be unsuitable.
What Should You Check on Exam Day?
- Cash accounts require full payment within the Regulation T payment period (T+3); selling before paying (free-riding) triggers a 90-day freeze, not a trading ban
- DVP/RVP accounts settle trade-by-trade with custody at a third party, eliminating principal risk
- A fee-based account can be unsuitable for a low-activity customer under Reg BI, even though it looks like the "premium" option